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Although Iceland's early Viking (and Irish) inhabitants were known to enjoy a flagon or two of beer and mead, their descendants were not as fortunate—at least for a time. Despite a lot of practice (Iceland has had a parliamentary system since the year 930), the electorate still sometimes got things wrong. In 1908, a referendum to ban all alcohol passed, and the country went dry, beginning in 1915.
The ban was lifted in parts over a period of years—spirits were legalized in 1933—but beer stronger than 2.25% remained off the table. Many drinkers and publicans got around the ban by simply pouring shots into their near-beer, confusingly called 'pilsner' (that's if they bothered with anything beyond spirits to begin with), but a focus on flavor was not often a prime consideration.
Finally, in 1989, the Alþingi voted to end the ban, and Beer Day is still celebrated as a national holiday every year on March 1.
Until very recently indeed, however, there wasn't much to get excited about. While the 'big' national brands may not share the size of their counterparts abroad (recall that Iceland only has around 320,000 inhabitants), the pale lagers they produced were certainly familiar to any overseas visitor (except, perhaps, for the prices, which remain very high).
The brand names recall the Viking Sagas—Egils Gull (Egil's Gold), a product of the Egill Skallagrímsson Brewery, tips its hat to the renowned Viking warrior and poet, while Thule and Viking, both lagers from the Vífilfell Brewery, continue in that vein.
But recently, new, more experimental breweries have come on the scene; Ölvisholt Brugghús opened in 2007, and it has gained fame as 'the' craft brewery in Iceland. Still housed in a converted dairy farm and co-owned by neighboring farmers, this very small brewery would feel familiar to many overseas craft beer fans—they offer brewery tours and tastings on-site, and their beers can be found in the 'in the know' bars in Reykjavik. Also like many small American breweries, their portfolio includes a lager that is a step up from the usual and a Belgian-style witbier, but its smoked imperial stout, Lava, is the beer than has been gaining fame beyond the North Atlantic. Brewed within sight of Mt. Hekla, this big, smoky beer has been winning fans both in Iceland and abroad; it's available in Scandinavia and Canada.
Following the example of Ölvisholt Brugghús are other small, independent brewers—Mjöður Brugghús is gaining local popularity for Jökull (which means 'glacier'), a German-inspired lager, while Bruggsmiðjan Árskógssandi goes in a Czech direction with their flagship beer, Kaldi. Its popularity quickly grew and they now produce four year-round beers.
The larger breweries are also getting involved with the craft beer scene (though mostly without the rancor they sometimes inspire in the US)—Ölgerðin (whose name simply translates as 'the brewery'), Iceland's oldest brewery, which survived prohibition by making non-alcoholic 'malt beverages,' started its own microbrewery called Borg Brugghús. Their first beer, Bríó, reclaimed the term 'pilsner' for Iceland (it's a real Czech-style beer, not a near-beer), and they have since introduced an IPA and an accessible blonde ale. Their marketing efforts tend toward a modern look and feel, without the Viking themes so prevalent in other Icelandic beers.
Of course, those need not be not absent from other large-brewery projects—Einstök, an offshoot of the Viking Brewery, opened in 2010; its focus has been international from the beginning. Although still very new, it has recently begun shipping some of its beers to the US and UK, notably their Toasted Porter and IPA; a Doppelbock is slated as its first seasonal launch. Like its parent company, it relies on Norse imagery, and why not? They come by it honestly enough.
A handful of craft breweries may not seem like many, even in a small country, but given that Iceland has had only a little over twenty years to re-discover legal beer, it's rather impressive—look for Icelandic brewers to follow their long-lost Norwegian cousins down ever-more creative beer recipe paths in the next few years.