Britain vs Iceland: after the Cod Wars, the ‘Wad Wars’

London’s aggression towards Reykjavik sheds light on the short-termism and immaturity driving the authorities’ response to the crisis.

Brendan O'Neill
chief political writer

13th October 2008

Never mind North Korea. Forget Iraq or Iran. Don’t worry about Afghanistan, where according to one newspaper columnist the only solution, seven years after the British/American invasion, is a form of ‘controlled warlordism’ (1). No, Britain has a far larger enemy on the horizon: Iceland. Population 304,367. A country famed for its fishing, geysers, and indie music. The only country in Europe with no standing army. The only country in the world where the prime minister’s phone number is listed in the directory. And a country which, according to British ministers, is behaving like a rogue regime.

Last week, British PM Gordon Brown behaved with ‘unusual aggression’ towards Reykjavik (2). As Iceland’s banking system collapsed, and as the country itself faces bankruptcy and a potential humiliating rescue operation by the International Monetary Fund (IMF), various British councils, companies, charities and individual savers look set to lose out. As part of the nationalisation of its failing banks, the government in Reykjavik has failed to guarantee British savings. This includes up to £1billion stored in Icelandic banks by 100 local councils, police authorities and fire services in the UK, and £25million invested by British charities. Brown has denounced Iceland’s actions as ‘totally unacceptable and illegal’ (3).

Brown has even used anti-terror legislation to freeze British assets in a failed Icelandic bank, leaving legal experts shocked that the British government would issue against a formerly friendly nation ‘the kind of order normally issued against organisations like al-Qaeda’ (4). Indeed, officials have openly hinted that the Icelandic government is behaving like a terrorist organisation. Asked if Britain’s use of anti-terror laws against Iceland constituted a form of ‘financial terrorism’, one British official said: ‘The question is, who are the terrorists?’ (5) Not surprisingly, Icelandic prime minister Geir H Haarde says he is shocked by Britain’s ‘hostile measures’ (6). A British delegation has been sent to Reykjavik to try to patch up a severely tattered relationship.

How has this happened? How have relations between Britain and Iceland so quickly and so openly fallen into a state of disrepair? Not since the ‘Cod Wars’ of the 1970s – when Britain and Iceland squabbled over fishing rights in the North Atlantic, culminating in various acts of sabotage (such as net-cutting) and violent acts of boat-ramming – have these two nations engaged in such an aggressive stand-off. Some might think this undiplomatic clash is a sideshow in the greater economic crisis sweeping the globe. In truth, Britain and Iceland’s war of words over bank savings – what we might refer to as the ‘Wad Wars’ – sheds light on the economic short-termism and political immaturity guiding the authorities’ response to the economic crisis, and their propensity to make things worse.

Short-term pragmatism rules the day

London’s freezing of assets in an Icelandic bank is part of its overall strategy for dealing with the current economic crisis: that is, by preserving already existing liquidity in the financial system or by injecting new liquidity in order to keep things afloat. Last Wednesday, the British government unveiled a £500billion bailout package, or ‘injection of cash’ as some refer to it, for the British banking system; this morning it outlined how £37billion of that will be pumped as ‘new capital’ into the Royal Bank of Scotland (RBS), Lloyds TSB and HBOS, meaning that taxpayers (the government) will ostensibly own around 60 per cent of RBS and 40 per cent of the merged Lloyds TSB and HBOS. Later this afternoon, the government will announce how its bailout package will benefit those British businesses with deposits in the Icelandic bank Landsbanki (7).

For all the discussion of the British bailout package as ‘bold’, ‘brave’ and ‘historic’, in fact it demonstrates that short-term pragmatism and a technocratic approach rule the day. The bailout shows that the government is determined to act, but also that it lacks the will or the foresight to take the tough measures necessary to ensure economic stability or possibly boost investment in productive areas of the economy. Across the Western world, from Washington to London to continental Europe, governments are responding to the economic crisis by injecting new liquidity into the system, without directing it to productive or profitable arenas, rather than contemplating more profound, possibly painful measures: cuts in state expenditure; raised taxes; the destruction of capital in order to restore the ‘sound’ operation of the capitalist economy (8). Governments are spending billions effectively to Keep Things As They Are.

Such short-termism, which fails to address the structural economic problems underlying the financial crisis, is intensifying the current predicament. For example, Western government’s attempt to secure certain banks has had the effect of relocating aspects of the financial crisis to Asia. At the end of last week, ‘the timbers of Asia’s financial house began to creak’, said one headline, as Asian stockmarkets took a hit: the Japanese stockmarket fell by 24 per cent, its worst five-day performance in its 50-year history (9). A key emerging problem is that as European bank deposits are guaranteed by governments, it is more difficult for Asian banks to continue in an unregulated form. It seems likely that banks will become more reluctant to lend to Asian banks given that, unlike Britain, Australia, some European countries and soon possibly America too, Asian banks come with no bailout-style government assurance. ‘If every other bank has a government guarantee, then you’re going to be at a bit of a disadvantage if you don’t have a sovereign guarantee’, says Michael Buchanan of Goldman Sachs Asia (10). Our leaders, far from getting to grips with or resolving the economic crisis, are taking measures that effectively push the crisis around the globe, like panicked individuals passing an unexploded hand grenade from one person to another.

At the same time, the focus on short-term technocratic fixes to the crisis may make the stand-offs between governments uglier still. It is, of course, true that economic crises historically have intensified geopolitical rivalries. Aggression between competitors is part and parcel of a capitalist crisis. As Marx said, while in times of crisis the capitalist class as a whole loses out, the question of how much the ‘individual capitalist must bear of the loss – ie, to what extent he must share in it at all – is decided by strength and cunning, and competition then becomes a fight among hostile brothers’ (11). Yet today, when the ambition of Western governments seems little more than to save banks and stabilise or create liquidity, the battle can become one over cash, over what is inside (or not inside) the bank vaults. Britain has exhibited ‘unusual aggression’ towards Iceland, whispered about it being a terrorist regime, and used anti-terror laws to try to revert Reykjavik’s allegedly ‘unacceptable and illegal’ antics. It seems fitting that, behaving less like capitalist regimes hoping to survive a serious shakeout of the industrial and service sectors and more like children fighting over a piggy bank, Britain and Iceland have displayed extraordinary levels of petty protectionism and international childishness.

The ‘Wad Wars’ between Britain and Iceland highlight the short-term, super-pragmatic, technocratic troubleshooting of our governments, and suggest that while this will do little to resolve the economic crisis – however painful such a resolution might prove to be – it will do a lot to spread the crisis, insecurity and political degeneracy around the globe. Our leaders are effectively bickering over liquidity in order to keep a bigger clash, and potential restoration of economic productivity, at bay.

A new era of diplomatic immaturity

The war of words between Britain and Iceland also shows that ours is an era of juvenile international politics, in which there are few remaining rules or accepted ways of doing things that might guide relations between states. We should not underestimate how extraordinary were the outbursts between Britain and Iceland. In seizing British assets and effectively denouncing their counterparts in Reykjavik as criminals (and possibly even ‘financial terrorists’), British ministers took the sort of actions that in the past would have been seen as a prelude to declaring war. Such an intense falling out between nations that have been friendly for more than 30 years is a product of both the shifting of economic power in recent years, and the uncertainty that process has unleashed, and the decline of the diplomatic check on nations’ behaviour that existed during the relatively stable Cold War period.

The aggressive stand-off between Britain and Iceland shows that the idea of ‘Europe’, at least as understood by European rulers and bureaucrats, counts for little in this time of crisis. Iceland is not a member of the European Union, but it has since 1994 been a member of the European Economic Area (EEA), alongside Liechtenstein, Norway and the 27 member states of the EU (which, of course, includes Britain). The EEA is based on ‘four freedoms’, which are meant to encourage openness and cooperation between member states: the free movement of goods, persons, services and capital between all EEA countries (12). Yet the current crisis has ripped away the veil of bureaucratic ‘European unity’. Now we have a situation where one EEA member (Britain) is using anti-terror legislation against another EEA member (Iceland) to punish its ‘illegal’ behaviour. So much for the ‘four freedoms’. The economic crisis has exposed deep internal divisions in Europe, as member states that put forward a united front on everything from plastics in toys to counter-terrorism measures now run back to their national territories in order jealously to protect the banks of their national capitalist systems.

The crisis has revealed a central truth about the European bureaucracy (the Treaty of Rome, the EU, the European Commission, the EEA) that has grown and grown over the past 50 years: namely, that this bureaucracy was never about doing away with national interests, in favour of a more progressive and internationalist system, but rather was about managing national interests in a manner that best suited Europe’s political elites. Through a consensus-driven system, which, importantly, worked over and above the heads of uppity, problematic national electorates, European governments found a way to work out and meet their own national interests in expert-packed, closed-off rooms away from the people. Now, a serious economic crisis has exploded this façade of European unity, forcing Europe’s rulers to return home and hunker down – not in order to engage with their publics, but to hammer out strategies that will best protect their banking systems against other nations’. Unlike moralistic-cum-political strategies on global warming or BSE, such a naked competition to preserve national banks is far more difficult to hammer out in the ivory towers of consensual Brussels.

Iceland’s current attempts to escape its severe economic crisis also show how much has changed in the arena of economic power and international institutions. As Frank Furedi has argued on spiked: ‘Today, the world economy is confronted with a loss of its equilibrium. Yesterday’s creditor nation, the US, has turned into a debtor – and a not-entirely developed power, China, has emerged as an industrial giant and the banker of the world.’ (13) Consequently, the postwar institutions that were established after the 1944 Bretton Woods agreement, and which were based on a belief that the US would remain as guarantor of global economic relations, are ill-prepared to deal effectively with the current crisis. So today, Iceland and one such institution, the IMF, seem unable to decide whether and how to rescue Iceland’s economy. And instead Icelandic officials are in Moscow, hoping to win an emergency loan of billions of euros from Russia, while individual capitalists (including Britain’s Philip Green) offer to buy the debts of Icelandic investment companies (14). In the midst of it all, Britain aggressively freezes assets. The mixed-up fate of Iceland speaks to today’s profoundly-changed international economic landscape, and the inability of old institutions to address new crises.

This confusion in international economic matters is likely to be exacerbated by diplomatic immaturity. Britain’s treatment of Iceland demonstrates very powerfully the out-of-control nature of contemporary foreign policy. National governments seem to have lost the language of etiquette and restraint that guided (for the most part) relations between Western powers in the recent period. Instead, they blunder into open spats and use the kind of language that would have been taken as a signal of warlike intentions in the past. A combination of outdated international institutions and juvenile domestic politicians seems to have intensified Iceland’s economic predicament.

The impact on the ‘real economy’

Finally, the Icelandic crisis shows the impact that the current financial fallout may have on what is termed the ‘real economy’. As a result of a stockmarket boom in the 1990s, Iceland’s banking sector grew rapidly, to such an extent that it eventually dwarfed the rest of the Icelandic economy: the banking sector had assets nine times the size of Iceland’s gross domestic product of $19billion. The ‘banking crisis’ in Iceland is intimately bound up with the country’s ‘real economy’, with some predicting job losses and lowered living standards for the Icelandic people as a result. Similar developments may take place elsewhere. Not surprisingly, people in Iceland are protesting. Last week, protesters gathered in the main square in Reykjavik to call for serious action to secure the economy; some Icelandic people have reported having problems withdrawing and transferring money from their bank accounts, and are demanding assurances from their leaders that their hard-earned money is safe (15).

There is no need to take sides in the disturbing spat between the governments in London and Reykjavik. Far better to side with the people of Iceland who, like many others in the developed world, may suffer as a consequence of their leaders’ mismanagement of the economy and the inability of international institutions to stabilise global economic conditions. Having lived harsh, hand-to-mouth existences for centuries, Icelandic people have only relatively recently enjoyed high wages, comfortable living standards and the fruits of modern technology. And despite the complaints of shallow anti-capitalists on web discussion boards – who argue that the Icelandic people typify ‘ordinary people’s stupidity’ in ‘bingeing on consumerist rubbish’ (16) – there is no reason why they should accept a cut in their living standards now.

Let Brown and Haarde bicker over who owns the real and not-so-real money in Icelandic banks. The rest of us should demand a far more serious debate about the economy than the one that has taken place so far, and call for a bit more bravery and honesty as we face up to this crisis.

Brendan O’Neill is editor of spiked. Visit his website here. His satire on the green movement – Can I Recycle My Granny and 39 Other Eco-Dilemmas – is published by Hodder & Stoughton in October. (Buy this book from Amazon(UK).)