The Blue Lagoon, Iceland’s most iconic site and biggest tourist attraction, was created by an accident: a spill from a nearby geothermal power plant in the 1970s. Keen to sample its healing powers and the warmth of its azure waters, people began flocking to the site.

Another ‘lucky’ disaster – the eruptions of Eyjafjallajökull volcano in 2010, which shut down air traffic across Europe and beyond and focused worldwide attention on Iceland as a result – set in motion an unprecedented and unexpected boom in tourism, the ramifications of which are still rumbling on today. Intrigue about this exotic island perched between Europe and North America at the top of the Atlantic, combined with a severely devalued currency due to a cataclysmic financial crash two years previous, brought the world to Iceland: since the eruptions, tourism has grown by 15% to 20% a year each year, and the industry is now the largest contributor to Iceland's foreign currency earnings. The eruption proved to be, if accidentally, a great tourism marketing strategy.

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Claims to fame

Eyjafjallajökull also helpfully shifted international focus away from Iceland's economic meltdown of 2008, when a banking system collapse brought the country to the brink of economic ruin.

“When you are a small country, people only know one thing about you – before it was [Icelandic pop star] Bjork, then it was the financial crash, then the volcano. But better a volcano than a financial crash,” says Óli Örn Eiríksson, head of economic development for the city of Reykjavík.

Now that economic growth has returned (charting currently at about 3% – higher than most of the rest of the Western world), Iceland’s investment promoters want to turn the page on the ugly chapter of the crisis, and are looking to foreign investment to bring about a much-needed economic diversification, which they feel would help prevent a future crisis.   

“There was a lot of uncertainty while the economy was trying to balance itself out,” says Mr Eiríksson. “But the uncertainty is now unfolding. We have gone from balance to growth and now we’re moving to a strategy of diversification with our industries and investments. Right now the economy is fragile because it is too simple.”

Fishing and related marine industries dominate the economy, with aluminium production also prominent, along with tourism.

Thordur H Hilmarsson, director of Invest in Iceland, says: “We are back on our feet again. But compared to other Nordic countries there are very few pillars supporting the economy and we would like to see more diversification. This is a goal of the government and of Invest in Iceland.

“Previously FDI was mostly large aluminium projects, but since the crash things have started to develop differently. The outside world also changed so we had to reassess our strategies. Now we are seeking smaller, more knowledge-intensive projects.”

New opportunities

Global headwinds seem to be blowing in a favourable direction for Iceland. A free-trade agreement with China went into effect in July, making Iceland one of only two Western countries to have such an agreement with China, and putting it in a position of being a good strategic location for companies from Europe and North America to carry out value-added processing for exports to China.

Large-scale mining and oil exploration activity set to ramp up in nearby Greenland offers the opportunity for transhipment and services in Iceland to support these activities. And if ships begin passing through the North Pole Passage – still only a possibility but an increasingly likely one due to changing weather patterns – then Iceland is poised again to take advantage of its location and become a transhipment hub for this traffic.

Vestiges of the crisis remain: all loans are still indexed so they rise with inflation, and capital controls are still in place – which are a big source of consternation from the business community, as well as causing worries that trapped capital could cause the system to overheat again. For greenfield investors there are exemptions to the capital controls, yet the message the controls send to the international market is not helpful.

“We see growth in most sectors, so much that people are now warning against that – we are growing too much and all has happened very quickly; we were in a deep recession, and now people are concerned that we might see overheating. So our job is just to try to be balanced,” says Iceland's minister of industry Ragnheiður Elín Árnadóttir.  

The minister insists the government intends to remove the capital controls as soon as possible and it is high on the agenda. But it is hard to know an exact timeline for when this could happen.

Accidental tourists

Coping with the sudden influx of tourists is another challenge. Because of the accidental nature of the boom, Icelandic officials had not a chance to properly consider what kind of tourist destination they want the country to be or to develop a long-term strategy. Thoughts are now turning to this topic.

“I think that we need to preserve the kind of sense of place that people are really looking for, so we’re taking action to steer the investment to places where we want hotels to be, because with an increase of 20% each year now for some years, you almost need to double the infrastructure every four or five years,” says Reykjavik’s newly elected mayor, Dagur B Eggertsson. 

The strategy, and new hotels, will need to happen quickly, because the newfound tourist appeal of Iceland shows no signs of letting up. UK-based airline easyJet announced it will double its capacity in Iceland, adding flights through Belfast and Geneva routes. Meanwhile, Iceland Air is growing rapidly, and cruise ships are bringing a bustling new trade. 

At the Blue Lagoon, the site of the lucky accident all those years ago, tickets are so in demand they are veritable gold dust.