Warm words for Icelandic boom return to haunt Salmond

First Minister's dream of building north Atlantic 'arc of prosperity' left in tatters

The dream that an independent Scotland could be part of a north Atlantic "arc of prosperity" has been shattered by the latest twist in the global banking crisis, Labour has claimed.

Two pillars of the Scottish economy, RBS and HBOS, are now part-owned by UK taxpayers after being bailed to the tune of £31.5bn by the Treasury. The crisis has left analysts asking how an independent Scotland could have saved the two banks from collapse, on a GDP of £100bn a year.

Others, with a sense of history, were recalling that the Act of Union between England and Scotland in 1707 came about soon after Scotland had almost been bankrupted by wild speculative investment in a colony in Panama.

The Scottish First Minister and SNP leader Alex Salmond had held up Iceland as a small country enjoying the kind of boom economy that Scotland could aspire to copy. Before the country's banking system collapsed, Mr Salmond suggested that Scotland could join Iceland, Ireland and Scandinavia in an "arc of prosperity". That provoked a scathing retort from the Scottish Secretary Jim Murphy who claimed that it would have been an "arc of insolvency".

And the Scottish Labour MP Anne McGuire claimed: "The risks of independence have never been more starkly highlighted. While families, savers and businesses in Scotland will be relieved that the UK Government has stepped in support RBS and HBOS, they only need to look at Iceland to see what would happen to an independent Scotland. Alex Salmond's fantasy economics held out Iceland as a model for Scotland. We can now see how dangerous that idea was. Scottish families, banks and businesses are far more secure as part of the fourth-largest economy in the world than if Scotland were to separate itself from the UK."

John Park, Labour's economics spokesman in the Scottish Parliament, added: "I could never understand what connected these countries in the so-called arc of prosperity. The Irish model was very much a high level of European investment, and low corporation tax, and the Scandinavian model was something different again. These economies did not seem to have anything in common other than the fact that they suited Alex Salmond's argument.

"But the watchword now for the Scottish economy is interdependence, not independence. People in Scotland have been very impressed with Gordon Brown's action in bailing out these banks and by the fact that, as a large country, we have been together. People are starting to say, 'what would have happened to these banks if Scotland had been on its own?' I don't think the SNP have an answer to that."

The SNP insisted that the idea of an independent Scotland was alive and well. Pete Wishart, the SNP's constitutional affairs spokesman, said: "It is a sign of desperation that the first priority of the opposition parties, during what is a global financial crisis affecting nations large and small, is to talk down Scotland's abilities in this ridiculous and ill-informed way. In all circumstances, the more economic and financial powers Scotland has, the better placed we will be to succeed and build a strong and competitive economy."

Some economists have also pointed out that as a member of the EU and the eurozone – as an independent Scotland would almost certainly be – the country would have been in a much stronger position to weather the financial crisis than Iceland.