Last Thursday’s blog post about Daniel Hannan’s view of Iceland has provoked a response. The Convestives MEP has replied in his blog on the Telegraph website (read it here).

Aside from selectively quoting from this blog to distort its argument, he describes Federal Union as having “a whiff of benign 1930s dottiness about its campaign: of handbills and sandals, Esperanto and vegetarianism, decimalisation and naturism.” I think these echoes of the 1930s are worth exploring.

The thrust of Daniel Hannan’s original blog entry was that individual countries should have opted out of the defence of the global financial system and allowed their own parts of it to fail. They themselves would have accrued some benefits and avoided the costs to fall on to others. Iceland, he says, has benefited this way: why could Britain not have done the same?

In the 1930s, there was the same debate. Should countries try to make their way through the economic downturn at the expense of others? Different countries set about devaluing their currencies against each other, with a net result of standing still. Trade barriers were erected against each other’s exports. Some countries repudiated their foreign debts: it was only foreigners who lost out so that did that matter?

This is the economic strategy of the pickpocket. If one person does it, they might make some money. If everybody does it, they merely end up stealing from each other, and nobody is better off.

It would have been, and remains, much better to address common problems together rather than with separate policies that actively undermined each other.

But the breakdown of the economic system also led to the breakdown of the political system. Jeffry Frieden, in his book “Global Capitalism: Its Fall and Rise in the Twentieth Century”, observes that:

“One only needs to know one thing to determine whether a country moved toward autarky and authoritarianism or remained economically open and democratic: whether it was an international debtor.”

Economic freedom and political freedom were inseparably tied up in that decade. A country that put, it thought, its own economic interests first and was prepared to pursue them at the expense of others in fact sacrificed both economic and political freedoms at home. Federal Union was resolutely in favour of free trade and against protectionism, for political reasons as much as for economic ones.

If I may use Daniel Hannan’s reference to footwear, it wasn’t the sandal that was associated with the “my country first” approach, but the jackboot.

It seems that Nick Clegg is still adapting to government. Describing the Iraq war as “illegal”, as he did in the House of Commons yesterday, may have made sense as part of his election campaign messaging, but not something to be said by someone deputising for the prime minister at the despatch box unless it is the official government view.

Given that many of his cabinet colleagues voted for that war – one of them, work and pensions secretary Iain Duncan Smith was leader of the opposition at the time and a committed supporter of the war – this is unlikely to be the case.

It also seems that he is still adapting to coalition politics. He demanded that Jack Straw, for Labour, account for his support for the “illegal invasion of Iraq”, but less than three months previously, he had been considering Labour as a potential governing partner. Was this demand of the Labour party part of his negotiating position at the time?

In an era of coalition politics, today’s opponents might be tomorrow’s partners, and it is unwise to erect barriers too high in front of them. It is not only between the governing parties that coalition requires a change in the style of politics.

But my real concern about the use of the word “illegal” by a member of the government is not one of politics but of substance. What does it mean to declare that a war is, or was, illegal?

It puts me in mind of those European bishops who used to bless their respective national armies as they went off to war, telling them that they had God on their side, even though those armies were going to off to fight each other. The notion of the legality of a war is currently an incantation designed to make people feel better about what they are about to do. In the absence of a legal system, the notion of legality is essentially meaningless.

The proceedings of the Chilcot enquiry have already seen Jack Straw standing by his view that the Iraq war was legal and further, in a note of 29 January 2003 to his Legal Adviser, he declared that “There is no international court for resolving such questions in the manner of a domestic court.” This is precisely the problem.

Unlike God, though, international law has the virtue of being an entirely human creation and therefore can be changed and amended as needed. Creating the kind of court whose absence Jack Straw noted is perfectly possible.

If there is any advantage in a statement from a member of the government, it is that the government has the power to make things happen. It can propose laws, and change policies, and establish precedents on behalf of the country. One such action it should champion now is the creation of a court, or the endowment of the relevant on powers on one of the existing international courts, to rule on the legality of war. This would not arise as the result of a legal action between states, but from an action against the government of a state by its own citizens.

If anything could truly be described as the new politics, it is this. It would turn Nick Clegg’s pious platitudes about the war into a solid achievement.

Personally, I do not believe that Nick Clegg went into politics intending to be satisfied by pious platitudes alone, but I accept that he may yet prove me wrong.

Conservative anti-European MEP Daniel Hannan writes from Iceland that, rather than bailing out the banks, they should have been allowed to crash. The apparent health of the Icelandic economy is proof that this would have been a better thing to do. Financial assets may have lost value, but real assets are as robust as ever.

This is a tragic example of a politician thinking small. Just because one country does something does not mean that every other country can do it too.

First, think about the banking bailout. What actually did it consist of? Some banks and insurance companies were propped by public money to prevent their collapse, a collapse which would have led their trading counterparties also to collapse, with bankruptcy rippling throughout the financial system. One might argue that there is a cost to the public purse of this bailout, but there would have been a greater cost if widespread bankruptcy had been allowed to proceed instead.

A major reason why the Icelandic economy appears health despite the bankruptcy of its major banks is that other countries did not go down the same route. They remain viable trading partners, able to buy Icelandic exports and to continue to supply Iceland with the imports it needs. If the credit crunch had been allowed to become worse – governments provided large amounts of money as emergency loans to otherwise solvent banks that were facing a liquidity crisis – trade credit would have dried up and with it the trade upon which a small, specialised economy such as Iceland’s depends. If the other countries had seen their economies collapse, many fewer of their citizens would be able to afford to travel abroad as tourists.

Which brings me to the second reason, the exchange rate. One of the ways in which the Icelandic economy has bounced back is the collapse in its exchange rate. Imports become more expensive and exports cheaper: this is Nature’s way of rebalancing the economy. Iceland used to be an expensive tourist destination but has now become a cheap one.

However, this is only true in the eyes of people whose own currency has not devalued. The generalisation of the Icelandic economic model would require everyone to devalue, which is of course not possible Devaluation all round leaves nobody better off.

So while a particular economic strategy might make sense for a small country, it is another thing to say that it make sense for a larger one or for the global system as a whole. Iceland has been able to follow its own particular policies against the backdrop of a global economy stabilised and guaranteed, for better or worse, by the United States. Iceland’s economic fortunes would be very different if the US had followed the same model.

And this leads to a very serious problem, namely the inability of the United States to maintain this stabilisation role indefinitely. For most of the 19th century, this was played by Britain, with America taking over after the first world war. A central part of the settlement after the second world war was the creation of the Bretton Woods institutions which enshrined American hegemony, and particularly economic hegemony, at their heart. However, that era of hegemony is coming to an end.

While America remains the world’s largest single economy, it is no longer massively so. It represented about 50 per cent of world GDP in 1945, and only 25 per cent today. The limits of military power have been displayed in Iraq and Afghanistan: it is not as powerful as it thought it was.

If the US is to give up this role as anchor of the global economy, what might replace it? This is where Europeans have got to stop thinking small.

After all, the eurozone represents 21 per cent of world GDP, and the EU as a whole 28 per cent. It could have just as great a claim as the US to anchor the world economic system, if it had the political means of doing so, but would face just the same limitations if it tried to do so alone. As part of a consortium, however, it might have a chance.

A partnership between America, Europe and some other economic powers could establish a new means of regulating the world economy and guaranteeing its trade flows, in a way that none of them could do on its own. And if Europe is to play a part in this, it must do so as a united whole. The individual European countries are too small to exercise influence in such a system, but the EU together can do so.

The question for European countries is whether they wish to take part in creating such a system, or prefer instead to be at the mercy of whoever in the end does so. They can think big, or they can think small.

It would be much better for Europe if America, have taken over leadership of the world economy from Britain 90 years ago, passed it on to an international consortium rather than to another single country, for that other country could only be China. And a world following China’s rules could be a rather less congenial place for liberal politics and economics.

James Kirkup in the Daily Telegraph politics blog today describes very well the background to the decision to release the Lockerbie bomber, Abdelbaset Ali al-Megrahi. Specifically, he explains why the UK system of government means that David Cameron is not to blame.

“What’s really odd is that this misunderstanding is taking place in country that has a federal system. How can US politicians steeped in the concept of states’ rights and the limits to federal authority not grasp the concept of Scottish devolution?

“Devolution means power over – and legal responsibility for – certain issues rests in Edinburgh with the administration elected by the people of Scotland. And not, repeat not, with the Government in London. One of those issues was the release of Megrahi. That’s because Scotland has its own legal system, quite distinct from that of England, and over which ministers in London have precisely no influence.”

Read the whole article here.