Dan Hind is the author of two books, The Threat to Reason and The Return of the Public. His e-book, Maximum Republic will be published later this month.

London, United Kingdom – This is a tale of two countries. One of them, Iceland, has a population of around 320,000 people. That’s about as many people as live in Lubbock, Texas. The other, the Republic of Ireland, is a fair bit bigger, with a population of 4.6 million. That’s about as many as live in South Carolina.

In the years before 2008, both countries had been hosts to unsustainable real estate and consumer booms. And in both countries a lightly regulated financial sector ran out of control. Iceland’s big three banks – Glitnir, Kaupthing and Landsbanki – had lent out more than US $200 billion, eleven times the country’s GDP. Ireland’s banks were holding assets of around seven times GDP on their books. Much of the money had been lent abroad.

“People in Iceland recognised that something had gone badly wrong with the country’s political system.“

When the financial crisis hit in the last months of 2008 the two countries reacted very differently. Iceland’s former prime minister, Davio Oddsson, explained that the recently privatised banks had been ‘a little heedless’ and the state wasn’t going to bail them out. Domestic deposits were protected but the government refused to take responsibility for vast bulk of the losses. In Ireland, on the other hand, the government transformed a banking crisis into a sovereign debt crisis. Politicians decided that the banks were too big to fail and spared no expense in their efforts to save them.

People in Iceland recognised that something had gone badly wrong with the country’s political system. They responded by drafting a new constitution and in May of this year they tried and convicted another former prime minister, Geir Haarde, for negligence. It all seems roughly proportionate to the scale of the crisis. But in Ireland, so far at least, there has been no serious reckoning for the political and economic establishment. One centre-right party, Fine Gael, has replaced another, Fianna Fail, in government. The personnel have changed, but not the policies.

On Thursday the Irish will decide in a referendum whether to ratify the European Fiscal Compact, an EU treaty that forbids governments from running budget deficits. The treaty is intended to lock national governments into a continent-wide programme of public sector austerity. Even the British government, with its appetite for public spending cuts, has refused to sign up. Intent on strangling the UK economy it may be, it is determined to do so at its own pace.

‘What the bankers want’

Last year the Irish government had to borrow more than 10 per cent of the money it spent. The economy is now in recession. There is no way that it can balance its budget any time soon. But acceptance of the compact will mark another step away from the path chosen by Iceland, where the needs of the global financial sector have, to some extent at least, been subordinated to those of voters.

“The bank’s losses can then be paid off through cuts in public spending and new forms of privatisation. Though it makes little sense… it has one great advantage… it is what the bankers want.“

At the moment the political class in much of Europe is trying to rescue the financial sector by shifting the costs of the banking collapse onto national balance sheets. The banks’ losses can then be paid off through cuts in public spending and new forms of privatisation. Though it makes little sense in strictly economic terms it has one great advantage, from the point of view of the politicians. It is what the bankers want.

In the scramble to balance budgets in the short term, states will sell or lease assets to private companies that will then charge fees for what were once public goods. The same people who made fortunes from the expansion of credit will make even more money from turning public property and nationalised utilities into corporate revenue streams. This doesn’t have anything to do with patient investment in new and more productive industries. It doesn’t even have the breathless elan of speculation. It is rent seeking of the most blatant and pedestrian kind.

There’s no easy way to deal with a burst credit bubble. Iceland also suffered a severe recession. It too has had to cut public expenditure. But there at least the country has had a serious debate about what happened – about what its politicians allowed to happen – in the run-up to the banking collapse. The social order responsible has been held to account and the country’s economy appears to be recovering in a way that is restoring the living standards of the people who live there.

I said at the beginning that this was a tale of two countries. But the real comparison isn’t between Iceland and Ireland. It is between Iceland and the European Union as a whole. At the moment most European governments are intent on policies that sacrifice the interests of the many to the preferences of the few. It shouldn’t surprise us.

It is, after all, the same formula they applied in the prequel. If this is to change then the five hundred million citizens of the European Union will have to learn some lessons from the 320,000 inhabitants of Iceland. If they don’t they will learn what the end of mass prosperity feels like instead.

In the mean time I hope the Irish reject the Fiscal Compact on Thursday, for their sake, for Greece’s sake, and for Europe’s sake.

Dan Hind is the author of two books, The Threat to Reason and The Return of the Public. His pamphlet Common Sense: Occupation, Assembly, and the Future of Liberty, was published as an e-book in March. He is a member of the Tax Justice Network.

Follow him on Twitter: @DanHind