Chauncey and Graff’s song, When Irish Eyes Are Smiling, was published in 1912, seven years before Eire proclaimed herself a republic and captured a romantic optimism that was matched by reality in 1995. For the next twelve years the young republic embarked upon a period of rapid growth and was re-christened the Celtic Tiger. The pride of her people was palpable and a joy to behold.

I have forebears who came from what were then the wilds of County Kerry. The southwest of the country is still immensely beautiful but when I visited there in 2007 it was not wild but a hive of activity, with second homes and tourist venues springing up around every bay. Ireland joined the European Union in 1973 as one of its poorest members. Using the transfer payments available from the richer countries in the Union, it improved its infrastructure and invested in education. With low taxes and English as its language, American companies in particular were drawn to it as a springboard into European markets. Having been a nation from which her people sought to emigrate, she became one to which they wished to return. And when the European currency was introduced in 1999, she was in the first wave of nations to adopt the euro. Irish eyes were, indeed, smiling.

Then came the financial meltdown of 2008. As Warren Buffet enjoys telling us, you only know who is swimming naked when the tide goes out, and when the financial tide went out the Irish banks were as naked as jay-birds. The cozy arrangements that often existed between politicians, businessmen and bankers had encouraged a mountain of rather optimistic loans to be advanced, much of it to the property sector. All this was cheered on by the general public who watched the value of their homes skyrocket in happy wonder.

When the credit elastic that had fueled the Anglo-Saxon property boom finally snapped, the Irish banks, like many others, were unable to borrow sufficient money to fund their liabilities from the now terrified money markets. To prevent a bank-run, the Irish government stepped in to guarantee its banks, without knowing the extent of the liabilities they were underwriting. An impossible task, in any event, because as individuals struggled to offload their encumbered assets, property prices reversed direction and the value of securities underpinning bank lending started to sink like a stone. And if that wasn’t bad enough, the government’s own fiscal situation became dire as tax revenues fell and hardship claims rose.

The Irish are proud of their independence and knew that they had no one else to blame but themselves, even feeling a degree of self-esteem in the knowledge that this was a problem for them alone to solve. A harsh austerity budget was prepared, and sufficient as been borrowed to carry the government forward into 2011. But the bond vigilantes are a harsh breed, sniffing out weakness wherever they can find it, and they are pricing Irish debt at distressed levels, suspecting that when the Irish government returns to the market next year, the liabilities it has assumed will overwhelm it.

This has sent shock waves through the entire euro area because the difference in prices the market is according to the euro bonds of Greece, Portugal, Spain and Ireland from those it accords to those of France and Germany is revealing that the euro area is not a monetary union but a monetary arrangement. If a country in the euro area is allowed to default, the euro area is dead.

So the decision facing not just Ireland but every member of the 12-nation euro area is how much sovereignty to give up in return for a genuine monetary union. An American state can default on its debt, but the central government is still there to underpin those transfer payments that ensure social stability. Even if the dollar falls, these are not immediately affected. But if a euro nation cannot raise the money to pay for its transfer payments because no one will lend it any, and if it cannot devalue its currency to make its bonds more attractive, the social hardship this would cause might well become unbearable.

What this means is that we have reached a decision point not just for Ireland but for the euro area as a whole. Are the twelve nations going to pool some more of their sovereignty and become stronger together, or will they blink and become weaker going it alone? The European Union has defied the skeptics at every turn, largely, I think, because the world is moving towards larger groupings to counter the gale force winds of globalization. My bet is it will do so now and that in a few years Irish eyes will be smiling again.

Lord Robert Mercer-Nairne has a doctorate in Organisation Theory and runs several small businesses. He has written several books including 3 novels, 2 collections of poetry and his most recent, a study of political philosophy, Notes on the Dynamics of Man (published by Gritpol). He lives in Scotland.