Tiny Iceland drew unflattering world attention last year when its overheated real estate bubble burst sending the nation perilously close to bankruptcy.  It was back in the news this week for a presidential veto that infuriated the United Kingdom and the Netherlands which is reflected in the pious declarations by the British papers.

The brouhaha started with the collapse of a subsidiary of an Iceland bank Landsbanki called Icesave that offered deposits in the Netherlands and the United Kingdom.  The key question is whether the government of Iceland was supposed to back all depositor funds beyond the amounts covered by the Icelandic Depositors’ and Investors’ Guarantee Fund set up under European Economic Area rules.  The legal case on whether Iceland’s tax payers are required to back up the deposit fund is shaky as well and not expressly required by the EU.  Even the Dutch have acknowledged that the deposit fund was not intended to cover a systemic collapse as happened with Iceland’s financial system.  Even in the United States where the FDIC covers only up to $100,000 of deposits, the deposit insurance fund simply does not have the wherewithal to bail out an entire banking system.

Then came the British overreaction that still has Iceland’s citizens seething.  When Iceland agreed to cover domestic depositors, it did not cover foreign deposits (it had not agreed to do so before the crisis in any case).  The British and Dutch stepped in to cover the deposits of their nationals.  Next Gordon Brown’s government misused anti-terrorism statutes to freeze all Iceland assets in the United Kingdom, probably the first time such action has been taken against a NATO ally, sending Iceland’s reeling economy into a tailspin and even bringing down another totally unrelated Iceland bank.  Next the IMF was used to bully Iceland to pay up.  British and Dutch grandstanding on the subject is weakened by the fact that their banks benefited from the same loose passporting rules to establish foreign subsidiaries that Icesave employed.  It is hard to imagine that they would have done what they are asking Iceland to do with respect to foreign accounts in the event of a systemic collapse.

The repayment plan forced down by the IMF is  about 5 billion dollars, chump change for Britain and the Netherlands but 40% of Iceland’s GDP and about $18,000 per citizen.  Iceland’s ability to pay is doubtful as well.  Seething from Gordon Brown’s use of terrorism statutes, the Icelandic public overwhelmingly oppose the plan and deluged the President with requests to veto it.  The President obliged and the veto now sends the plan to a public referendum where it is almost certain to fail.

As a matter of policy, it is not really clear why a government should back all deposit accounts.  It seems an invitation to moral hazard and can cripple an economy in a financial crisis like Iceland’s, particularly when (as noted in the article linked earlier) the legal arguments are shaky.  Gordon Brown’s overreaction made it harder for Iceland to pay back this debt and it is not clear why the United Kingdom should not be penalized for its disgraceful misuse of anti-terrorism statutes and the collateral harm they caused to Iceland’s economy.  Given the small size of the loan by British standards and the financial stress a long term ally was under, Gordon Brown should have resisted the temptation to flex his muscles for domestic opinion and tried to work out a deal.  Instead he made a bad situation worse and now threatens Iceland with financial isolation.

The legal principle employed by the British and the Dutch is a dangerous one too.  Evidently now the taxpayers of the country of formation have to bear the burden of the obligations of a corporation abroad.  Its time for cooler heads to prevail and pull the British and Dutch back from their overreaction and threats to financially ruin a NATO ally.

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• Urban development killing the pigeon rearing tradition in Bangladesh.  Having seen the amount and stench of droppings the birds nicknamed rats with wings can create, somehow I don’t think the other city dwellers are too unhappy.
• Getting pregnant is now a court martial offense.  Only celibate married soldiers need apply for this General’s army.
• More climate change in India.  The rainfall in the wettest place in the world is dropping rapidly.
• Britain looks at modifying its onerous libel laws.  There is a reason why the brilliant South Park episode on Scientology ended with a threat to sue in England.
• Religious fundamentalism in Israel.  Rabbis say that loyalty to God trumps the orders given by the state (of course they interpret God’s word).  Why exactly are the American right wing so eager to give these religious zealots a free pass?  How exactly are they different than the so called “Islamofascists”?

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Jackie Ashley from the Guardian has an article detailing the various machinations on the subject.  On a sidebar after reading the article, it is amusing to see how much the cause of union is aided by the Scottish need for a financial bailout.  A major selling point for the Act of Union in 1707 allegedly was a financial bailout for the disastrous Darien Scheme.  With Scottish Banks requiring bailout today it is not surprising that some Scots can appreciate the benefits of the Union Jack over the Saltire standing by itself.  With the Scots absorbing a higher proportion of Westminster’s largess it is not surprising that the English have cooled a bit on the Union.

The modification in English attitudes reminds me of the response of a friend resident in Ontario at the thought of Quebec seceding from Canada.  He was tired of Ontario subsidizing Quebec and then hearing grumbling from Québécois on how they would be better off with their own country.  Similar attitudes prevail today in Belgium with Flanders and Wallonia eternally at odds with each other and very few “Belgian” institutions (the monarchy and the soccer team) in place holding the country together.  Unions of different cultures are always difficult to sustain.  When the common bond (historically it was often religion or a personal union of crowns) starts to fray, people are all to eager to question whether the sum of the whole exceeds the sum of the parts.  A few more velvet divorces may be in the offing.

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The Economist thinks that the UK’s political parties should call Scottish Nationalist Party chief Alex Salmond’s bluff an hold a referendum on Scotland’s future.  With only about a third of Scots hankering for independence a referendum could put the idea of reviving an independent Scotland in cold storage for some time.  Alternatively it could set a precedent for repeated referendums on the subject as in Quebec.  The idea of a referendum is fairly unusual in the United Kigdom’s constitutional history.  The Parliament being sovereign major decisions have always been decided in Westminster.  This does permit the passage of essential but unpopular decisions, but they could also result in the elites thumbing their nose at public will (as was the case with the original Act of Union).  None of this will of course address the fundamental constitutional flaws that the United Kingdom currently faces.

This link by Andrew Sullivan about a proposal to replace the House of Lords got me thinking about an issue that has fascinated me for a while.  How did government structures evolve as to their current form and how does a country choose a structure best suited for its needs?  Why do countries with a similar socio-economic background have differing successes with the same governmental system?  As Afghanistan founders in its presidential election and Iraq struggles to draft an electoral law these are pressing concerns in current affairs.  So this will be the first of a series of (non-academic) ramblings on the subject surveying the evolution of ruling systems through history.

Thomas Bingham’s proposal in someways is emblematic of the patchwork way the United Kingdom’s unwritten constitution has evolved.  Most of its constitutional developments have been ad hoc attempts to address the problem at hand rather than a result of a comprehensive review of how and why things are the way they are.

King John abuses the nobility, get the Magna Carta.  Henry III squanders money on foreign favorites and wars (and a quixotic attempt to place his son on the Sicilian throne) get the Provisions of Oxford and Westminster.  Edward I wants money for wars in France and Scotland get a parliament.  Worried about a Catholic monarch, toss him out, restrict his successor’s power and bar Catholics from the throne.  Worried Scotland will break the personal union of the crowns when the childless Queen Anne dies. ram through an Act of Union. Expand the franchise as needed.  If the House of Lords gets in your way, cut down its power and alter its composition.  The United Kingdom did completely separate out its judiciary from Parliament until October 1, 2009 when it finally created a Supreme Court.  Until then it was a function of the House of Lords.

The piecemeal approach has generally worked, but there are some major inequities in the current system.  Even Thomas Bingham’s proposal does not address the problem created by devolution of powers to a Scottish and Welsh Parliament.  Scottish and Welsh ministers in Westminster can vote on solely English issues.  However, English MPs cannot vote on items devolved to the Scottish and Welsh Parliaments.  The London based governments of England have historically been slow to address issues of concern in the far off regions of the country. Read the rest of this entry »

Since World War II the British and American governments have harped on the special relationship between the “mother country” and the first of its children to leave. An interesting read from last week’s Christian Science Monitor on how special public opinion in the United Kingdom finds the relationship.  It is not surprising that the British could resent the country that replaced it as the global behemoth.  The loss of empire after World War II, the economic malaise and then the jarring realization during the Suez Crisis that it could not operate a foreign policy in opposition to the United States are bound to hurt the self esteem of a country that thought the sun would never set on it empire (notwithstanding the prestige of an undeserved permanent spot on the Security Council with fellow second tier power France).

Even though it is still about the 7th largest economy in the world the United Kingdom still tries to punch above its weight with the 4th largest defense expenditures in the world  (just below China almost twice as much as India without anywhere near the same security threats).  The history of colonial rule and the aggressive attempts to remain relevant still keep the United Kingdom as a possible bogeyman for tyrants from Iran to Zimbabwe.  At other times it can cause embarrassments, like the spats with India in the past decade from clumsy attempts to interfere in the Kashmir dispute.  See here and here.

It is difficult for a major power to adjust to a diminished status through slow decline.   The declines of previous major powers whether abrupt like Sweden, Germany and Imperial Japan or over a longer period like Spain, Austria-Hungary. Ottoman Turkey and Manchu China received a major assist from military defeats.  The British case is unusual in that it fought and won two world wars only to find itself exhausted and surpassed by its erstwhile allies and then its former foes.  The absence of that defining defeat probably made it harder to accept a diminished world standing.  Not that defeat can always bring such objectivity.  France is still overcompensating for the triple  debacles of World War II, Algeria and the Indo-China war culminating in the decisive defeat at Dien Bien Phu.  But however annoying the Gallic Rooster can be to Americans, French self esteem has not suffered from a policy of supine abasement that the “special relationship” entails.  When was the last time a French leader was called the poodle of any foreign power (even if the string of French military debacles since 1870 have prompted other phrases)?

So Britain frets that the torture and arrest of Barack Obama’s grandfather and father when Kenya was a British colony may cause him to resent it.  A purported snub of the Prime Minister causes national hyperventilation. Why is the United Kingdom so keen for marks of favor from the occupant of the White House?  Who cares?  Its time British politicians publicly discussed whether the “special relationship” is worth the cost in national self esteem and human life.  With its wealth, the United Kingdom will not be entirely unimportant.  But by cutting loose some of its ties to the memories of past grandeur and operating within its means, it may be a happier one.