Is small still so beautiful?

Tweet For years, opponents of self-determination for Wales and Scotland have pointed to the size of the two countries and argued that we were too small to be independent. The almost inevitable response of both Plaid and the SNP has been to point out how successful a number of small countries have been in recent decades. It was a sensible and logical counter argument – with the added bonus of being entirely true.

Does the collapse of Iceland's banking system, and the near bankruptcy of Iceland change the argument? I don't see that it does, although perhaps Iceland is less likely to feature as a specific comparator for a while!

The problems with Iceland's banks are not in any way the result of the small size of the country. Banks have failed in large countries; banks have failed in small countries – size per se hasn't really been a factor one way or the other. What has been more important in determining whether and to what extent any country has been affected has been the nature and extent of regulation and control of the banking industry.

Would a larger country have been better able to sustain the collapse, or rather the cost of the bailout? It seems to me that the real determinant of how well any country, regardless of size, could cope with the sort of bail-outs which are happening at present is more to do with the size of the banking sector as a proportion of GDP than with the absolute size of the country or its population.

For all the glee with which some seem to have seized on the problems in Iceland, claiming that they have 'proved' that small countries are worse off, I really don't see that anything has been 'proved' beyond the need for all countries to ensure that their banks behave in a prudent fashion. The real danger is that people who concentrate on the size argument fail to learn that simple lesson.

Investment begins at home

Tweet The collapse and nationalisation of an Icelandic bank has obviously caused problems for a number of local authorities in Wales. Some people have suggested that the councils concerned have made unwise decisions about where they placed their funds. The leader of the WLGA, John Davies from Pembrokeshire has said that "It would be wrong to apportion blame. These investments are done with sound advice behind them.", and on this occasion, I agree with him. The bank appears to have met all the relevant lending criteria which councils are advised to follow, and councils have merely been attempting to obtain the best return that they could get.

What I do question, however, is whether it is right that we allow – let alone encourage - councils to place their deposits overseas at all.

I understand the councils' problems; they receive part of their money in large blocks, and they also have to keep prudent levels of reserves for emergencies. As tax-payers, I'm sure we would all prefer that that money was earning interest rather than sitting idle, and we'd want them to be getting the best return. The nature of such investment by councils is also relatively short term – individual councils need to be able to get their hands on the money fairly quickly.

Nevertheless, I still wonder. As I've argued before, I think the biggest economic problem we face in Wales is how to get our GDP per head up to at least the UK average level. I don't see how depositing Welsh assets in foreign banks, even in the short term, is making much of a contribution to that end.

Clearly, given the constraints upon them, councils cannot directly use these funds for long-term investments which would lock up the cash, but perhaps if the councils and other authorities involved were able to act in a more collective fashion, they would have more flexibility overall. The sums invested in Iceland are large, but they're still just a fraction of the total which has been deposited in banks by Welsh authorities. The overall total fluctuates throughout the year, reflecting cash flows, but on any day of the year, there is still a sizeable amount of our money invested in banks and building societies, some of them foreign.

Retaining the money within Wales might well lead to a marginally lower return on investment for the authorities; but if the result was an improvement in the Welsh economy, the overall result for taxpayers would be beneficial. Put another way, 'best rate of interest for authority X' may not be the same as best value for the Welsh economy.

Instead of individual councils stashing away their own cash, why not pool the temporary surpluses of all Welsh public authorities and use at least the core minimum which will always be present to invest in the Welsh economy?