Brussels lumped Ireland together with Greece and Latvia yesterday on a hit list of countries with “excessive” government deficits, in the latest blow to the pride of the economy once envied across Europe and dubbed the Celtic Tiger.

Over the past decade, Dublin’s model of attracting footloose multinational firms with low corporate tax rates and a well-educated workforce became the model for small nations everywhere, even prompting Scottish first minister Alex Salmond to talk wistfully, in 2006, of joining Ireland and Iceland in an “arc of prosperity”. Between 1995 and 2002, Ireland achieved GDP growth averaging 8.6% a year - an extraordinary performance, worthy of emerging economies such as India.

Now, more than a year into a devastating housing crash, and with its export-dependent growth suffering badly, Ireland is mired in a deep financial and economic crisis. “We’re certainly going through a significant economic downturn, which was initially led by the correction in the housing market, but has broadened out to involve more sectors,” said Michael Crowley, economist at the Bank of Ireland. After 10 years of chalking up budget surpluses as the tax revenues rolled in from the rampant housing market, Dublin is wrestling to prevent its deficit busting into double figures for 2009 - well above the 3% limit imposed by the European commission. Brussels made clear that it was reluctant to impose any sanctions on countries plunged into financial difficulties by the credit crunch, but labelling Ireland an “excessive deficit” country ratchets up the pressure on the government.

Brian Cowen, the Taoiseach, has already cut back on investment projects, and is locked in a furious battle with unions about imposing an across-the-board pensions levy - in effect a pay-cut - on all public sector workers, in an attempt to save €2bn (£1.76bn).

Not only is the property crisis devastating Ireland’s consumers, but many of the jobs created in the boom are now disappearing. Last month computer manufacturer Dell announced that it was shedding 1,900 workers at its Limerick plant, moving some to Poland and contracting out others. At the same time, the government is dealing with the consequences of a rash lending spree by Ireland’s banks during the good years. Anglo-Irish Bank was nationalised in January, amid a scandal about secret loans to a “golden circle” of shareholders. In the latest twist to the crisis yesterday, Cowen faced bruising allegations that these shadowy shareholders would benefit from the nationalisation. Opposition parties claimed in the Dáil that at least one of the 10 is close to the ruling party, Fianna Fáil, but Cowen countered these claims by saying that he has no idea who the 10 shareholders are. There were angry exchanges, with the Taoiseach accusing the opposition Fine Gael of a political smear campaign and “juvenile conspiracy theory” against him.

The government’s pledge to safeguard all deposits in the Irish banking sector helped to stabilise withdrawals from the shaky sector last year; but it has also spooked investors, by leaving Dublin exposed to a vast liability, compounded by the risk that the government gets saddled with billions of euros of bad loans from the banks.

Concerns about the deterioration in the public finances have become so severe that Ireland has even been compared with Iceland, which was forced to turn to the International Monetary Fund.

Dietmar Hornung, a credit analyst with Moody’s in Frankfurt, said Ireland’s bonds were on the brink of losing the AAA status that makes it cheap for Dublin to borrow. “The negative outlook [on Ireland] indicates the possibility of a downgrade within 12 to 18 months,” he said.

The price that investors must pay to insure themselves against a default by Ireland has soared, indicating market scepticism about the government’s plans. In practice, any eurozone member state that is at risk of defaulting on its debts would be likely to be bailed out by fellow members to avoid devastating knock-on effects.

However, Alan Hearne, an economist at the National University of Ireland, Galway, says: “Global markets are very risk averse at the moment, and they are panicked, but I think a rational, calm look at the fiscal position would tell you that this should be manageable.” He said the debt-to-GDP ratio could rise from a healthy 25% in 2007 to over 60%, or perhaps even 80%, in the years ahead.

However, there are some causes for optimism. Wage cuts across the private sector, although painful for employees, are helping to restore competitiveness. But Crowley says the days of the Celtic Tiger are over. “Maybe we have to engage in some revisionism here, and maybe it wasn’t really the miracle people talked about.”

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