Will UK Scuttle Iceland's EU Membership Bid?

I'm sure that most of you are familiar with the events surrounding the collapse of Iceland's banking sector during the march of the global financial crisis which I've posted about in some detail before [1, 2, 3]. As the creditworthiness of giant Icelandic banks was called into question, many offshore depositors suffered collateral damage. In order to stem public panic, the governments of the Netherlands and the United Kingdom ponied up money to ensure these depositors got their money back. And, it doesn't really need to be said, collect from Iceland later.

However, there is still an ongoing spat over how much and when the Dutch and British would be compensated by the Icelanders. Aside from Iceland having to resort to IMF help, it too believes the Netherlands and the UK aren't considering the burden being placed on Icelandic taxpayers by making compensation due and demandable in short order. Unfortunately for Iceland, you can say that the EU member countries in this story have it all over the Nordics. For understandable reasons, Icelandic leaders have been keen on entering the EU as soon as possible as eventually adopting the euro should ease balance-of-payments pressures of the sort that sunk it. Still, approval will likely be contingent on reaching some sort of compromise with the Dutch and British:

Iceland was put on a fast track to join the European Union today, but the Cameron government served notice that it could block the country's membership unless it settled the £2.3bn Britain says it is owed as a result of the country's financial collapse two years ago. European government chiefs at a Brussels summit decided that "accession negotiations should be opened" with Iceland. At British and Dutch insistence, however, the summit said that Iceland would have to address "existing obligations such as those identified by the European free trade area surveillance authority", a reference to the fallout from the collapse of Icesave in 2008 that left 400,000 depositors in Britain and the Netherlands fearing for their savings.

The Icesave dispute generated acrimonious negotiations, with the terms for reimbursing the British and Dutch rejected first by Iceland's president and then by the Icelandic public in a referendum. Earlier this week, William Hague, the foreign secretary, made it plain that Britain could veto membership unless the dispute was settled. "Iceland will have to recognise its obligations," he said. "We won't block [opening negotiations], but we will want it clear at the start that Iceland meets its financial and legal obligations."

"We've taken note of that," Stefan Haukur Johannesson, Iceland's chief negotiator with Brussels, told the Guardian. "It's a contentious issue between our three countries. But we don't see it as linked with the accession process." In October 2008, following the collapse of Landsbanki, Icesave's parent, the Brown government sparked outrage in Iceland by invoking anti-terrorism laws to freeze Icelandic assets in Britain. The government in Reykjavik denounced the UK move as "an absurd decision".

Johannesson said that it was "self-evident that we will live up to our obligations" but insisted there could be no direct linkage between the financial row and the European negotiations. Iceland is otherwise likely to have a relatively smooth passage through the negotiations because it is in effect already part of the European single market.

As before the referendum that made Iceland delay its payments, I still believe that its best interests are served by "shut up and pay."