The collapse of Iceland's economy was as speedy and spectacular as the eruption of one of its famous geysers.

The volcanic island seemed to be one of the big winners over the last decade, creating a formidable banking sector that invested heavily in all sorts of toxic financial products like subprime mortgages.

But when the whole house of cards collapsed, Iceland's economy virtually died: three banks went bust and the island suffered the humiliation of becoming the first western economy to be bailed out by the International Monetary Fund since 1976.

It gets worse. The Icelandic krona lost nearly half of its value, so homeowners who took out mortgages in foreign currencies have been clobbered by the appalling exchange rate.

Around 30 thousand of them have property sinking in negative equity, a huge figure for for a country whose population is only a little over 300 thousand.

And it won't get better anytime soon, with the economy predicted to reverse by up to ten per cent in 2009.

The challenge for Iceland' s Social Democrat Prime Minister Johanna Sigurdardottir is enormous.

The world's first openly gay leader thinks long-term stability lies with Iceland joining the EU within four years.

But persuading her coalition partners won't be easy.

Many of them reflect a deep unease among Icelandic voters about losing their sovereignty.

One poll in March found less than 40 per cent of them in favour of EU membership.

And Iceland's powerful fishing industry is likely to have a thing or two to say about Brussels laying down the law about when, where and how much they fish.

Iceland is already in a spat with Norway, who accused its Nordic neighbour of breaching global agreements by deciding its own quota.

Sigurdardottir says she won't let EU membership compromise how her country exploits its natural resources.

But however much goodwill she enjoys, she may find the realities of office make her EU dream just a fishing expedition.