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The global banking crisis in 2008 set off a battle in Europe, pitting tiny Iceland against Britain and the Netherlands. Some British and Dutch citizens lost their savings when Iceland’s international banks went under. Their own governments reimbursed them, to the tune of billion of dollars. Now, the British and Dutch governments want Iceland, in turn, to reimburse them. But Iceland is balking. The World’s Gerry Hadden reports from Reykjavik.

HADDEN: When Iceland’s banks collapsed and its currency, the Krona, lost half its value, Icelanders were hit hard. Many homeowners had mortgages pegged to foreign currencies, such as the US dollar or the Japanese yen.

"Your bank doesn't care about you," reads this Icelandic fridge hanging.

One Reykjavik resident, who didn’t want to give his name, says his yen-based mortgage has more than doubled with the Krona’s depreciation. Sitting in his kitchen on a snowy morning, he says the financial pressure destroyed his marriage.

ANONYMOUS MAN: All the stress. You can just imagine all the sleepless nights over this. We are separated now. I’m not going to put that entirely on this but it certainly didn’t help. It’s just the stress of the whole thing. It is really hard to…you can’t plan for anything. The whole family life just goes to pieces.

HADDEN: Iceland’s bank collapse didn’t just hurt Icelanders. One online bank, called Icesave, went under with billions of dollars worth of deposits belonging to British and Dutch account holders. The British and Dutch governments covered their citizens’ losses. Then the governments demanded that Iceland pay up. Negotiations have been on again-off again. John McFall chairs the UK parliament’s Treasury Committee. On Friday he said Iceland risks isolation if it doesn’t cover Icesave’s debts.

JOHN MCFALL: I think Iceland has got to ask itself a question: Does it want to participate in the global economy or do they want to find themselves in a deep, deep mire?

HADDEN: For many Icelanders, the answer is clear: a nation of about 317,000 people simply cannot pay back billions in lost deposits. The Reykjavik homeowner says it would drive the faltering country under.

ANONYMOUS MAN: I am against the state taking on private debt. When a private company, bank or whatever makes a mistake the stakeholders in the company are the ones that should take the fall or the cost of that. And that’s it.

HADDEN: Icelanders vote on the issue in a public referendum next weekend. Polls suggest they will reject any plan to pay back their European neighbors. That might make Icelanders feel better in the short term, says economist Thorolver Matthiasson. But Iceland now wants to join some of those same neighbors in the European Union. Matthiasson says the UK and Holland could use the Icesave issue to block Iceland’s EU bid, and that could hurt Iceland down the line.

THOROLVER MATHIASSON: We would not have investment coming our way. We would not be included when decisions are taken regarding the markets. Our firms would start to have problems exporting to the EU.

HADDEN: Iceland didn’t always want to join the EU. For years its currency was strong. Unemployment held steady at about one percent. But all that has changed, says Bogi Andersson. Andersson is the former head of Iceland’s state broadcaster. He says even though the Euro has weakened in recent weeks, that’s nothing compared to the Krona’s slide.

BOGI ANDERSSON: I think I can safely say that the krona is smallest independent currency in the world. And in this world of modern finance it is seen as inviable. Far too small, too vulnerable. So people want a stable currency. It would be far easier to make business plans, to plan for the future, within a stable currency environment, which is almost impossible in Iceland today.

HADDEN: But EU negotiations will take time…a couple of years, at least. In the meantime, unemployment here now stands at 10 percent. Young people are starting to emigrate, although not all have given up hope.

Oern Haroldsson isn't waiting for his country to get its economic house in order.

Reykjavik now has two ‘start-up cooperatives.’ They’re places where young people with ideas and energy can set up shop for free. One coop is called The Ministry of Ideas. It’s a nondescript building on the waterfront that combines a café, meeting hall, performance and office space. About a dozen start-ups are already working here. One guy is trying to market an inflatable stretcher. Another company is launching games for iPhones involving mind control. Mind Games founder Oern Haroldson says this space is the positive side of the crisis.

OERN HAROLDSON: This is an excellent place to start. We are a very young start up. And here we have the facilities needed. Desks, internet. But more important is connection to other saround us. Share ideas, etc. very helpful. And actually our team has grown based on being here, actually.

HADDEN: Haroldson says an entrepeneurial spirit is what Iceland most needs now, no matter how the Icesave controversy is resolved.

For The World I’m Gerry Hadden, Reykjavik, Iceland.