The current government is a coalition of the conservative Independence Party (led by Prime Minister David Oddsson) and the rural-based Progressive Party (led by Foreign Minister Halldor Asgrimsson). The two parties, which have been in coalition since the 1995 election, hold a comfortable majority in parliament, even though the IP lost some ground in the May 2003 elections. Oddsson has been prime minister since 1991, making him the longest-serving prime minister in Europe (from 1991 to 1995, the IP was in coalition with the Social Democratic Party).

Three left-wing parties--the Social Democratic Party, the People's Alliance and the Women's List--formed an electoral coalition prior to the 1999 parliamentary election in the hope of mounting a credible challenge to the long-dominant Independence Party. But the dream of creating a united left coalition failed when disaffected leftists formed a new far-left splinter party called the Left Green Party, led by former deputy People's Alliance leader Steingrimur Sigfusson. With these defections, the left coalition won a disappointing 27% of the vote (17 seats) in the 1999 election, four percentage points below what the three parties had won running separately in 1995. Their 31% (20 seats) showing in 2003 recaptured this ground but did not suffice to topple the government. The Left Greens, on the other hand, surprised everyone by winning a respectable 9% of the vote (6 seats), and clinging to that support in 2003. Another new splinter party, the Liberal Party, won 3% of the vote (2 seats) in 1999 based on its strong opposition to the current fishing management system, and managed to double that support to just over 7% (4 seats) in 2003.

Despite the poor electoral showing in 1999, the three left-wing parties decided to formally merge in 2000, creating a new party, the Social Democratic Alliance, led by Ossur Skarphedinsson. The party has found it difficult to reconcile the widely varying foreign policy views of its members, which range from strong support for NATO membership and the U.S. military presence to pacifism and a return to traditional neutrality.

When Iceland became a republic in 1944, the post of president was created to fill the void left by the Danish king. Although the president is popularly elected and has limited veto powers (he can force a public referendum on a proposed law by refusing to sign it), the expectation is that the president play the same limited role as a monarch in a traditional parliamentary system.

The current president is Olafur Ragnar Grimsson, a former political science professor who led the People's Alliance in 1987-95 and served as finance minister in 1988-91. Although Grimsson won office with only a 41% plurality in 1996, he was not challenged for re-election in 2000. This follows a well-established tradition of giving deference to sitting presidents. Once in office, a president can generally count on serving as many terms as he or she likes, assuming good behavior. Since the establishment of the republic in 1944, a sitting president has been challenged for re-election only one time and that effort fell far short (in 1988, against then-President Vigdis Finnbogadottir). Reflecting the belief that the president is "above politics," presidential candidates run for election as individuals--since 1952, political parties have played no role in nominating or endorsing candidates. During his term, Grimsson has occasionally drawn criticism for breaching the bounds of presidential etiquette by being too outspoken on sensitive political issues.