Greenhouses ripening bananas are one thing you don’t expect to see dotted about the freezing Icelandic plains where the glaciers sweep down to the volcanic plateau. The greenhouses, which shelter the hardy Icelandic ponies from the bitter east wind, are powered by geothermal heat, which bubbles away under the lava.

This is, after all, a volcanic island and, as a result, energy is practically free. The Icelanders figure it is cheaper to grow their own tropical fruit than import it. Evidence of this geological bounty is everywhere. All around the country, geysers blast steam from under the angry ground, heating homes and generating free electricity.

These extraordinary sights can be seen vividly from the air on a clear day. This morning’s plane from Reykjavik to London is full of bankers and their lawyers who are trying of get their money back.

They have no chance, because Iceland is bust. Like Ireland, some Icelanders went on a borrowing binge, buying assets everywhere. The assets have collapsed in value, the cash is gone and there is no money left to pay the debts.

That such a thing can happen in the country the UN judged as having the highest standard of living in the world last year presents a huge dilemma for modern economics. The conundrum is this: good countries can go bad. Let’s explore this idea a bit more and then come back home to see whether we can learn anything from the Icelanders.

Two years ago, Iceland was judged by Transparency International to be the least corrupt country in the world. The place is totally bilingual, and life expectancy is the best in Europe. The prime minister is the world’s only openly gay leader, and it has the oldest parliament on the planet. The country has no enemies. It doesn’t even have an army.

So how did a country with the highest level of educational achievement in Europe, free energy and a brilliant health service come to be regarded as a financial pariah? How come financial markets can judge a place like Iceland as delinquent and yet regard a place like Dubai – where women don’t have the vote and an immigrant underclass slaves away with no rights – as a safe haven? How do we explain this quandary?

Traditional economics suggests that countries that are corrupt, badly managed, illiterate and intolerant are the ones that collapse. In the morality tale that normally accompanies economics, we are told that countries that spend huge amounts on arms and not hospitals and schools are likely to fail.

In this black-and-white world, it is easy to label failed countries with weak currencies as crony capitalists, cowboys, kleptocracies and the like. These tags satisfy our desire to see the world through a safe moral prism, where clear-thinking economics alone is sufficient to lance the boil of bad governance.

In the past few years, much of the ideology that accompanied the idea of free markets, free capital movements and globalisation had as its political handmaiden the assumption that the less regulation there was, the better for society in general. Indeed, for ideologues the objective of free markets would be to deliver a peaceful, high-income society that looked and felt like Iceland. In the event, free capital movements and light regulation, far from securing a society like Iceland, practically destroyed it.

This dilemma presents the great ideological fault line of the next generation. We in Ireland cannot opt out of this discussion because this is what our next election (which will come, let us hope, sooner rather than later) will be about. Make no mistake about it: the Great Crash of 2009 will have serious political ramifications and, for Europeans at least, they will centre on the ‘Icelandic conundrum’.

The crux of the issue may be that financial markets do not move in a smooth, organised fashion. In fact, they behave in precisely the opposite manner, gushing and gurgling irrationally, rendering everything endemically unstable.

I’m thinking about this as the bankers beside me are trying to figure out away to ensnare the Icelandic population and make them pay for the greed of a few individuals who broke the country.

Some 20,000 feet below lie the Westman Islands, a great volcanic archipelago named after the Westmen – the Irish -who were taken here as slaves by the Vikings in the 10th century. This story explains why 30 per cent of Icelanders have Irish, not Norse genes. What’s more, considerably more Icelandic women than men have Irish genes, because the Vikings did what it said on the tin: they raped and pillaged, taking slave concubines home with them.

Strange as it seems, Icelandic would have been the language of Dublin 1,000 years ago. This is what Dublin would have sounded like. There are still echoes of it today. Just think of our street names. Anyone familiar with Stoney batter in Dublin, which was a Viking ghetto in medieval times, will recognise the name Oxmantown Road. The Oxmen were the Ostmen – the men from the East – who lived in Ostmenstown – the Viking ghetto. Ostmenstown later morphed into Oxmantown.

The Irish and the Icelanders are genetically and historically linked. But more crucially we are now linked prospectively, because we are both faced with the Icelandic conundrum. If free movement of capital can almost destroy a perfectly formed society that has achieved the highest standard of living in the world, then should capital be heavily regulated?

Maybe there is another connection to the Westman Islands that might allow us to see the dilemma more clearly. The islands are volcanic places. An Atlantic Vesuvius gurgles away beneath them. It erupted in 1973, leading to the mass evacuation of these descendants of Irish slaves, chaos, fear and ultimately resettlement.

An interesting way to look at financial markets is that they behave like volcanoes. The markets, like the earth’s inner molten core, are a cauldron bubbling away under the surface, full of pressures, strains and tensions.

Like volcanic activity, we can monitor this, but can never predict where or when it will explode, dragging banks, currencies and ultimately countries with it. Nor can we predict the ferocity of the explosions, the tsunamis triggered by them or the devastation or scale of the clean-up operation.

The crucial difference is that we can control the markets in away that we can’t control the earth’s lithosphere. Maybe, if we want to avoid the Icelandic conundrum, where very good countries go bad, all we have to do is control the irrationality of the markets by heavy regulation.

One thing which is clear, as I lookup the aisle to first class on this plane, is that the future of Ireland and Iceland should not be left to the snake-oil salesmen in Prada, who are nothing more than the well dressed foot soldiers of a tattered ideology.

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