The Icelandic and Irish economic problems have been regularly used against the arguments in favour of independence, largely thanks to Salmond’s ill-timed boast that Scotland should join them in an arc of prosperity. So often are these two countries mentioned as independence bogeymen, by seemingly otherwise wavering voters, that it is clearly vital that Yes Scotland obliterates this fear as an obstacle to victory in 2014.

Iceland
Iceland is a country of ~300,000 people that has built its economy on fishing and smelting aluminium. The economy was in a comfortable position around 2005, enjoying average annual growth of 3% since 1995 and the public debt was a comfortable 25% of GDP. This success had led the small island to be festooned with academics, containing more researchers per capita than any other country in the world. Iceland could be summed up in two words around this time – educated and restless. Reckless was waiting in the wings.

Caught up in the heady tailwinds of aggressive Capitalism, stories abound of successful fisherman turning their hand to currency exchange hedging and advanced derivative trading. City boys steamed in, took over and a crazy Wall St mentality quickly materialised. The ensuing madness could be summed up with a simple metaphor*: if one Icelander owned a dog and the other a cat, and they valued each animal at $1bn, they could lend each other their animals and use that $1bn asset to trade and grow around the world. Fantasy economics, in keeping with the US’ commercial debt papers but far outstripping it for sheer lunacy. Academics around the world provided growing warnings that the Icelandic economy was out of control but the male ego could not be pierced and foolish financing continued.

The UK bought what the former fishermen were selling hook, line and sinker, ending up with $30bn of exposure locked up in this tiny country. If you think clever people should have seen what was coming, keep in mind that Oxford University alone invested $50m. It seems that Brits were the greediest investors, chasing the highest yields and not stopping to question how sustainable Iceland’s promise of a 14% return actually was. Not very was the answer.

Would Scotland make the same mistake? We have plenty of fisherman but I don’t see them being so cavalier as to plough into investment banking any time soon. In a way our naturally curtailed ambition would work to our advantage there. Could Scottish banking assets replicate Iceland’s at the height of the storm and rise to being worth 1,400% of GDP? Unlikely given our balanced economy and 5m population to Iceland’s 0.3m. RBS has had its wings clipped and HBOS has been lost to Lloyds, all with the Scottish economy still in reasonably good shape. There is little scope for any repeat of the recent past from now avowedly risk-averse financial institutions and, furthermore, there would be little appetite for the public to bail out any wayward private companies down the line.

Ireland
Ah Ireland, you charming fools. A population size not dissimilar to Scotland’s, a political outlook not dissimilar to Scotland’s and an economy not dissimilar to Scotland’s. Even their football results are gravitating towards ours. Why wouldn’t we make the same mistakes as the Celtic Tiger, especially given we (perhaps) wouldn’t have the safety net of the European Union beneath us as we stagger into a new future alone?

Well, let’s back up a bit.

Irish banks lent cheap money backed by low interest rates and low corporation tax rates to companies that built homes and properties in order to keep the manic chain of credit -> profit -> credit going as quickly as possible. When credit was choked and properties were suddenly unable to be sold, companies and individuals found they didn’t have the cashflow to service their debts and banks found they had €bns of loans that were unlikely to be repaid. The 13 year Irish bubble had been burst, with devastating effect.

Foreign debts of €110bn could not be met and a tangled web of global exposures unwound over the next few years. In Ireland, recession hit, unemployment rocketed (14.6% at Feb 2012), immigrant workers left, shares plummeted, governing parties were ejected from Parliament and austerity budgets were drawn up. Not great craic.

Could the same mistake be made in Scotland? It’s more likely than repeating Iceland’s many errors to be sure, and given Salmond has heavily hinted that he would like Scotland to drop Corporation Tax rates (Ireland’s is 12.5%), then a second Celtic Tiger getting into trouble through cheap money isn’t out of the question. However, lending is anaemic right now and financial institutions in Scotland will have learned most of the lessons of the past. The only way that Scotland could replicate Ireland is to have a golden decade ahead of us, time enough to join the European Union and time enough for academics and risk modellers to warn us if we’re getting ahead of ourselves.

Furthermore, the three banks that were most responsible for the Irish banking crisis, Anglo Irish, Bank of Ireland and AIB, were all truly Irish banks with no parent company providing oversight in a global context. Scotland may have RBS, but the rest of the banking competition, Barclays, HSBC, Lloyds and even Virgin, all have wider controls in place that would avoid their being colectively too big and too reckless for one country the size of Scotland. Even RBS’ potential for disaster is shackled by Government ownership for the near future, not to mention its already clipped wings, and I don’t see Airdrie Savings Bank rising up and taking the Scottish economy with it any time soon. It’s quite simply a different ball game in Scotland to the hurling of money that was sloshing around in Ireland in the past couple of decades.

There are further ways to mitigate the risk of ‘doing an Ireland’, if the Yes Scotland alliance is brave enough to adopt truly radical policies. House prices overheated in Ireland, and to a lesser extent in the UK, because too many people saw themselves as a property magnate. Bricks and mortar are the building blocks of a decent pension but taking on crippling debt to hoard a wide property portfolio is the kind of selfish, quick buck philosophy that only causes problems in the long term. With house prices currently still too high, and accommodation shortages well publicised, a clean, golden bullet solution for an independent Scotland would be to simply ban second homes. Put simply, safeguard supply by tempering demand.

If home ownership is the best route towards a comfortable pension, then surely we should clear a path towards as many Scots as possible getting to that stage. Individuals and couples with surplus money typically put it into an investment property or two, reducing the number of available properties to buy and also contributing to the rich getting richer and the poor getting poorer. Furthermore, this will drastically reduce the risk of Scotland having an overheated domestic debt problem as it will reduce household gearing. Sure, this policy would reduce current house prices and could exacerbate current problems by leaving homeowners in negative equity, but this downside would be factored in and negative equity isn’t a problem if you don’t intend to move home. Even for those that would move, a slight downsizing would be the solution given house prices would decrease across the board.

Exceptions could be made for bridging loans, moving between properties and holiday homes but at a fundamental level the message would be thus – Owning more than one property is greedy and not in Scotland’s collective best interests. It is a prime example of a policy that could work in Scotland, would have helped Ireland but wouldn’t even get a foot in the door south of the border, the type of policy Yes Scotland should be adopting to highlight where the change in independence could lie and how it is learning the lessons of the past. Indeed, as far as I’m aware, there’s no stopping the SNP adopting this policy at a devolved level from Holyrood before the referendum takes place. A few radical policies might not go amiss as the rather timid approach to selling independence hasn’t worked so well so far.

I’ll say something else about Ireland and Iceland that Scotland could learn from. They really are in it together, and that’s worth something. Is Scotland really bought into the direction of travel that the UK is taking? One would have to conclude that it isn’t, and that comes at a cost, financial as well as emotional.

Ireland and Iceland, even if in a financial hole, can look at health and education and justice and take a holistic approach to finding solutions. Scotland is unable to do this as we are shackled alongside the rest of the UK that wants to move in a different direction. That doesn’t make either side right or wrong but it’s like a 3-legged race with 2 different finishing lines. You can’t win.

One other benefit from the financial woes of our near neighbours is that other countries will learn from their mistakes. Scotland suffered deeply from the Darien scheme of 1690 but didn’t make the same mistake again until Fred Goodwin went on a swashbuckling adventure and helped to buy ABN Amro for a stupefying £46bn. One could say therefore that the still somewhat cautious, Calvinist Scotland is now safe from serious financial error until the 24th century.

At the very least, don’t let anyone smugly say ‘What about Iceland and Ireland?’ while shrugging their shoulders in a self-satisfied manner as if they’ve won the argument.

* several parts of this post loosely, and occasionally directly, derived from Michael Lewis’ wonderful Boomerang book