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Originally published January 27, 2009 at 12:00 AM | Page modified January 27, 2009 at 11:11 AM

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Europe's leaders facing heat as Iceland government falls

Iceland's coalition government collapsed Monday, the first government to fall as a direct result of the global economic turmoil.

LONDON —

Iceland's coalition government collapsed Monday, the first government to fall as a direct result of the global economic turmoil.

Prime Minister Geir Haarde said he and his Cabinet would resign immediately. As personal savings have been wiped out and joblessness soars, Icelanders — once among the world's wealthiest people — have taken to the streets in protest, banging pots and pans and throwing eggs and toilet paper at Haarde and other parliamentary leaders.

Protests have mounted throughout Europe, where the political backlash to the crisis is growing. In Ireland, Britain, Spain and other countries where bankruptcies and home foreclosures are rising, polls show approval ratings of leaders are sinking. In Eastern Europe and Greece, where there is less of a government safety net, protesters have spilled onto the streets by the thousands. Last month's collapse of the Belgian government, which had been wrestling with long-standing conflicts, was also hastened by the banking crisis, analysts said.

The Latvian government, which this month pushed through wage and spending cuts but also tax increases to cope with the banking crisis, faced demonstrations that turned into violent riots. Neighboring Lithuania also had to contend with protesters after the government introduced a package of austerity measures to protect the financial sector.

Tens of thousands turned out in the Spanish city of Zaragoza last week to press local authorities to deal with soaring unemployment as the country's construction and retailing industries are hit by the global downturn. In all cases, the demonstrations have had a mix of sentiments — anti-globalization, anti-capitalist and anti-reform.

So far, Europe's largest economies, France, Germany and Britain, have been spared demonstrations. All three governments have introduced huge stimulus measures aimed at spurring employment and protecting banks.

Regardless of the outcome, the three countries will face large budget deficits and higher state borrowing, which economists say will be passed on to taxpayers. And in the case of France and Germany, the governments could find it more difficult to introduce bold reforms in a time of recession.

French President Nicolas Sarkozy, who had advocated strong state intervention to protect his country against recession, is thinking twice about introducing a variety of reforms, especially involving high-school education, because of the fear of demonstrations. Already, Sarkozy is dealing with another round of trade-union strikes, which started Thursday, to protest unemployment.

In Germany, Europe's biggest economy, Chancellor Angela Merkel's coalition government recently pushed through a batch of stimulus measures worth more than 80 billion euros. These are aimed at curbing unemployment by providing public money for roads, schools and consumer car-loan incentives.

But with many German companies already hit by the global slowdown and desperate to introduce savings and keep wages down, strikes cannot be ruled out. Lufthansa, the profitable national airline, has already seen warning strikes, with its union demanding pay raises of more than 10 percent.

Still, despite tens of thousands of workers who have been put on shorter working weeks, the Merkel government has not yet faced massive anti-capitalist demonstrations.

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Instead, Germany's leftist parties, fighting bitterly among themselves to gain political mileage during an election year, are heaping blame on bankers, not the regulatory processes, for the financial crisis.

Perhaps nowhere has the economic crash been more spectacular than in Iceland, an island of 300,000 on the edge of the Arctic Circle. Last fall, its largest banks went bust and the value of its currency plummeted. In recent days, protests intensified as no leader took responsibility for the crash, prompting police to use tear gas for the first time in half a century.

People felt that the government was "playing the violin while the Titanic was sinking," said best-selling Icelandic author Andri Snær Magnason in a phone interview from Reykjavik. "Everybody who has a loan is paying 20 percent interest," and even those who own modest homes find their salaries cannot cover what is owed, he said.

Haarde announced Friday that he would call early elections and said he would step down. He cited health reasons and said doctors were treating him for cancer.

But ahead of those planned elections, Haarde's Independence Party could not come to terms with the Social Democrats, its main partner in the 2-year-old coalition that was scheduled to stay in power until 2011.

The Social Democrats have called for the firing of the central-bank governor and for closer ties with Europe. The nation has purposefully sought to stay outside the European Union, but now many believe that if Iceland had the euro as its currency instead of the krona, this crisis would not be so severe.

Foreign Minister Ingibjorg Gisladottir, head of the Social Democratic Alliance Party, is expected to start talks immediately with smaller parties in an attempt to form a new government that would rule until the elections. She has been receiving treatment for a brain tumor and said she does not want to be prime minister.

"Iceland is certainly leading the way of the social protests and the political fallouts," said Simon Johnson, former chief economist at the International Monetary Fund and senior fellow at the Peterson Institute for International Economics in Washington. "I think it's going to spread; we're in a phase now we're beginning to see all the political fallout."

Copyright © 2009 The Seattle Times Company

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