Economic crisis causing geopolitical shifts

Following the bankruptcy of Lehman Brothers and further falls of such institutions as AIG and Washington Mutual the world financial markets have seen increasing signs of trouble. With potentially more large failures and bankruptcies to come the fear in the market has led to freeze in credit. While the economic ramifications of this are being explored throughout the media it's impact on diplomacy and security is set to the side. Though some economists would prefer optimism the nature of the financial crisis suggests the world is headed for an economic depression of unprecedented scale. Such economic woes have been decades apart and always led to a massive shift in global politics. The Long Depression signaled the rise of continental European economies against the British economy and spurred the Scramble for Africa. The Great Depression helped propel Adolph Hitler to power in Germany. So too will such an economic depression in the modern age lead to political upheavals around the world.

In Europe the most notable casualty has been Iceland. While not heavily involved in the American financial system Iceland heavily relies on foreign debt. The freezing of credit markets and declining value of the Icelandic currency has put Iceland's major banks in dire straits with all three being taken over by the government. It is estimated this crisis on its own will leave Iceland in an economic depression. Iceland's financial system is not only dependent on foreign debt, it is heavily invested outside of Iceland primarily in Europe, most notably in the UK.

It is the relationship with the UK which is most at issue. Many British citizens have cash deposited in Icelandic banks and the situations of those banks put their deposits at risk. Originally the deposits were freezed with British depositors unable to access their accounts. This led to a threat from the UK to take legal action against Iceland in order to secure the deposits. Instead the UK seized British accounts using anti-terrorism legislation. Iceland's reaction was furious and he denounced the British seizure as an "unfriendly act" and claimed it was the reason Iceland's largest bank, Kaupthing, had to be nationalized. Even domestic security was a concern as the Prime Minister of Iceland was escorted by security guards for the first time. The Prime Minister has also said he would support legal action against the UK by Kaupthing.

The crisis in relations between the two countries has already been compared to the Cod Wars, a fishing dispute that led to several naval confrontations, but it is Iceland's means to rescue its economy which signals the greatest impact of the crisis. Iceland's Prime Minister expressed disappointment with its "friends" when they denied the country the support it asked for, with Iceland seeking a loan from Russia. The fact the United States and Europe failed to support Iceland during a period of financial need while Russia immediately responded to the approach will likely dampen Iceland's ties with NATO and dim further its chances of joining the European Union. It could also be the beginning of an unexpected partnership between the two countries certain to upset the balance between Russia and the West.

Iceland also poses a strong risk of financial contagion possibly on the level of Thailand in 1997. This would likely be felt first in the UK and Nordic countries, but is likely to then spread into the general European economy. It has already sparked united action by the eurozone nations and it is likely the situation will serve to further desires for greater European integration and the formation of a European superstate which is likely to become a major economic and military power, though one which may see itself in opposition to the United States.

The global financial crisis is also likely to worsen conditions for nations already suffering under their economic conditions. Pakistan has been hit hard by corruption, insurgency, and high oil and food prices. It now faces a situation where it will need billions of dollars in order to avoid national bankruptcy. Already Taliban forces recieve more money than Pakistani soldiers, if Pakistan's government is unable to adequately fund its military the chance of defections increases and the weakened financial state of Pakistan's government, and by extension its military, will also prove a fertile recruiting ground for the Taliban and leave it even more exposed to attacks by Taliban forces. The potential for the complete collapse of Pakistan increases greatly should it be plunged into bankruptcy. Financial strains on the global system may make it harder for Pakistan to get needed support.

While Israel is for the moment unharmed by the global financial crisis it is still taking measures to shore up its banking system. Israel's stock market has also taken a very serious hit in light of the worsening global outlook. This increases the likelihood of a government being formed soon in Israel, one which will likely be tougher than Olmert's government. It also will likely divert Israeli money from other areas and potentially rules out requested assistance to Gaza. Former British Prime Minister and International Mideast envoy Tony Blair has said around $30 million are needed a month to keep Gaza's banks from collapsing and insure financing for the salaries of thousands of civil servants. Should that situation arise it is likely to further destabilize the region and inflame opponents of Israel at a time when Gazan militants are threatening a response to Arab-Jewish violence in Israel. It also is at a time when Hamas is accusing Israel of preparing an invasion with military exercises and Israel has been making further incursions into Lebanese air space and even briefly sending troops across the border. An economically unstable situation in Gaza in tandem with other developments could increase the chances of a war erupting in the region.

As the economic situation deteriorates further even greater shifts should be expected. Such crises have traditionally been the breeding ground for nationalism which in turn has led to expansionism and increased competition between major powers. This competition for dwindling world resources and dominance over important markets usually has only one result: war.