Is Iceland too small to be a country? No one can be in doubt that the fierce toughness which has carried the country through past disasters will hold good now. One question, as Iceland picks itself up, is whether this nation of just 300,000 people should now forego some of its bitterly-defended independence, and join the European Union and the euro.

The cranes are still working in Reykjavik, building the opera house and seafront luxury flats, but no one is sure if they will be occupied. The imported Range Rovers now filling car lots waiting to be shipped and sold abroad have been nicknamed "Game Overs". The blaze of light at night — geothermal energy is cheap — makes the capital look like a city of several million, but the traffic lights in the new financial district change for half an hour at a time without a car passing.

"This island has been trying to kick us out of here for the last 1,000 years", says Finnur Oddsson, managing director of the Iceland Chamber of Commerce. "There have been massive shocks before" — not just volcanic eruptions, but thecollapse of herring stocks in the 1970s, he points out, and Icelanders have clawed their way back.

The reputation for toughness is not a myth. Difficult times are easily within living memory, and there has been an almost gleeful reassertion of old stoicism (and old recipes for blood sausage). Family ties are enormously strong, and will ease the impact of job losses and house repossessions. It is a young population; in the winter gloom, tiny children in hooded snowsuits are everywhere.

But the collapse exposed the concentration of commercial life, dominated by three tycoons (the "expansion Vikings"), based around each of the main banks. Lars Christensen, Copenhagen-based head of emerging markets at Danske Bank, argues that officials' unpreparedness for the crisis, and their "disastrous" handling of it, stemmed partly from the incestuous political culture. Heidar Gudjonsson, managing partner of Novator, part of one of the main commercial groups, goes as far as to say that "we should outsource government and governance. We don't have the talent pool."

In one sense, intimacy has been a strength. It has made for good entrepreneurs, so used to a flat society that they go straight to the top. But it has also suppressed criticism, where the cost of a row may be a life-long feud. The three tycoons own about 90 per cent of the media, and Oli Bjorn Karason, editor of a financial website (who sold one of them a business newspaper), says: "I have been wondering whether wider ownership of media would have brought more helpful criticism". He adds that "one of the good things that could come out of this is that we could reorganise business in a more healthy way".

Would joining the EU solve these problems? Some, in subtle ways. It might help repair Iceland's alliances, after a month of confusing declarations (at which the Governor of the Central Bank has excelled). The row with Britain over compensation for savers is not trivial, given the £4.5 billion at stake, although it lacks the heat of the Cod Wars. And Iceland's worldwide search for funds has left ragged edges.

Geir Haarde, the Pruime Minister, erupted in anger at allies' reluctance, but US officials express bemusement, saying that Iceland, which approached a preoccupied Federal Reserve not the Administration, appears to have presumed the door was shut because it did not get an instant yes. Haarde's courtship of a Russian loan also disconcerted Nato allies and Nordic friends.

It would be surprising if Iceland did not explore EU membership when the worst uncertainty has passed. Two thirds of Icelanders now want that, and even more business people want the euro. At a Reykjavik conference this week on whether small countries could maintain their own currency (resounding answer "No"), many economists argued that euro membership would not have prevented the crisis. But it would remove the risk and expense of trying to stabilise a vulnerable currency.

Haarde has argued that the benefits of joining the EU are less than the costs, such as the possible sacrifice of the 200-mile fishing zone. Iceland has managed its stocks well, where the EU Common Fisheries Policy has failed. But some officials quietly suggest that fishing (now only several per cent of the economy) might be negotiable, if the EU could make concessions.

No one would doubt that Iceland's fierce independence will continue. But the trappings of that stance — including its own currency, as well as the luxury of confusing its allies — may now look too expensive for a small country to bear.

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