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The Financial Crisis And State Size

Jacob T. Levy is the Tomlinson Professor of Political Theory at McGill University.

Since 1990, the world has seen something of a proliferation of new independent states: 15 from the old Soviet Union, two from Czechoslovakia, six or so from Yugoslavia, plus Eritrea and East Timor.

This has not been caused by, but has certainly been aided by, a sense that the minimum size for state viability wasn't very large in an era of peace and free trade. The Baltics couldn't militarily survive the late 30s and early 40s, but that's not our world anymore; the Czech and Slovak Republics had no economic need to stay unwillingly joined if they could trade across an international boundary almost as easily as within a common one. Regional defense organizations and regional trade unions--prominently NATO and the EU--made a huge difference here.

The Russia-Georgia war perhaps marks the end of the "peace" described above. Being in line for NATO membership someday is nice and all, but it's not remotely the same as being part of a great power that protects you as part of its own territory.

And the financial crisis may--may--mean that minimum viable state size ratchets back up on the economic side as well. Being Singapore or Switzerland or Luxembourg or a banking haven in the Caribbean has been a pretty good deal in an age of easy trade in goods and easy capital mobility. But now: Iceland gets caught in the financial crisis having to bail out a bank with assets many times its GDP, and without the deep capital or foreign currency reserves that a place like the US or Germany or Japan or Britain has.

This suggests great trouble for Quebec nationalism as a project, maybe somewhat less for Scottish or Catalan-- Iceland has a separate currency that's taking a beating; Scotland and Catalonia would be in the EU and probably in the euro zone. But the lack of capital depth would have hit Iceland now even if it were inside the EU and the euro zone.  As we've seen, the EU's financial infrastructure and capital reserves aren't so tightly integrated as to prevent country-by-country problems. Economist Tyler Cowen points to this list of European banks with assets larger than their home countries' GDPs.  Iceland's Kaupthung is at the top of the assets--GDP ratio--but the Netherlands, Belgium, and Luxembourg look like they could have trouble brewing too.

Small-country wealth within free trade has been one of the virtues of the broadly liberal era we've been living through. When states are dominant economic actors, it's far more important what state (and how strong a state, and how big a state) you live in.  And the instability that has sometimes been associated with secession and state proliferation is nothing compared with the instability of an age of state expansion and consolidation, when great powers return to the quest to incorporate their neighbors and their rivalries over who gets what.  I don't think we're at doomsday, or back in 1914.  But I do think that the Iceland meltdown (so to speak) is a worse sign for our international political economy than has generally been noticed.

--Jacob T. Levy