While the deficit is huge, the Irish problems are somewhat different than the fiscal problems of other PIIGS governments. Other PIIGS governments suffer from high and structural public deficits due to unsustainable welfare spending and uncompetitive factor markets. Governments, most prominently the Greek one, used deficit spending to artificially increase the living standards of their populations. Deficits financed the unemployed, public employees, and pensioners; this served to sustain inflexible labor markets.
“The euro came with an implicit bailout guarantee permitting governments to overindulge in debt.”
Not so in Ireland. In some sense Ireland was even too competitive. Ireland has the lowest corporate tax rate in the Economic and Monetary Union (at 12.5 percent). The tax rate attracted banks from all over the world to expand their businesses on the island. As a consequence, Ireland’s banking sector expanded substantially. During the boom years, banks earned immense profits through their privilege of credit expansion and their implicit government backing. As a result of the credit expansion, an Irish housing bubble developed. And its burst caused substantial losses and even insolvency for Irish banks.
While banking profits during the boom were private, its losses were socialized on September 30, 2008, when the Irish government guaranteed all Irish bank liabilities. As of late 2010, Ireland has injected about €50 billion into its banking system. The Irish problems were created, not by an excessive welfare system, but by the socialization of the losses of a privileged banking system.
(Read more from mises.org)