Ireland’s situation is certainly uncomfortable. The 2010 budget deficit was about 32% of GDP, largely due to one-time costs of bailing out the banks. For comparison, the US budget deficit is about 10%, close to the expected Irish run rate excluding the one-time costs.
Amidst all the excitement about the PIIGS, one thing is often overlooked. While the credit problems are very serious for the individual countries, the potential cost of bailing them out is rather small on the European scale.
For example, Ireland’s 2010 budget shortfall is expected to be about $23 billion for 2011. Compared to the EU GDP of around $15 trillion this is a fairly insignificant number. The cost to the EU of simply writing Ireland a check for their shortfall would cost the tax payers about the same as the loss on the $80 billion US auto bailout.
All other PIIGS, possibly excluding Italy, are also small enough that their debt problems shouldn’t pose a real risk to the EU economy, and none of them are large enough to exhaust the $750 billion bailout fund the EU has already set aside.
While PIIGS clearly make good news stories, it is unlikely that they will materially affect the EU economy or default rather than draw on the bailout fund.