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For a period it seemed that Ireland had escaped the worst. It was early into the recession. It was bold in slashing the budget deficit. It was praised for taking tough, unpopular steps.

Irish Finance Minister Brian Lenihan and Spanish Economy Minister Elena Salgado at EU finance ministers' meeting, Brussels, 6 September

Yet today Ireland is facing searching, serious questions. Is it sliding back into recession? Is its recovery losing steam? Is it getting to the point when an increasing share of its revenue is needed just to service its debt? Could Ireland default? Could the former Celtic Tiger be locked into a cycle of decline?

Hanging over Ireland is a question that hangs over many of Europe's countries. Is it asking the almost impossible to expect recovery while implementing deep austerity programmes?

Let's begin with the bad news. Ireland's economy shrank 1.2% in the second quarter. That was not expected. Its budget deficit at 11.6% is the highest in the eurozone. Unemployment is edging towards 13%. House prices are down somewhere between 35 and 50%. Wages are off 13%. Prices are falling. The Irish economy has contracted by 14%.

Then there is the cost of serving its debt. Ireland is now paying over 6% to borrow cash for 10 years in the bond market.

And if that were not enough, there is the unresolved crisis in the banking sector. The government has still not been able to say categorically how much it will cost to absorb Allied-Irish and all its debts. Will it be 25 billion euros or much higher? We are promised a "final figure" next month but it is proving difficult to assess the liabilities because the Irish property market is still declining.

Some fear that fixing the banking system could be close to 30% of economic output. There remains an underlying concern that the final figure for bailing out the banks could exceed the government's ability to pay.

As Barclays Capital Credit Strategists concluded: "Ireland's solvency concerns will not be put to rest this year".

It remains possible that Ireland could get to the same point Greece got to, where it proves almost impossible to service its debt.

But there are big differences between the two.

Ireland has financed almost all of its budget until the second half of next year. Its auction on Tuesday of 1.5 billion euros was over-subscribed. It has a breathing space.

Finance minister Brian Lenihan says the growth figures are not as bad as they appear. What he calls home-grown businesses have stabilised.

Ireland's economy does not need, it seems, the structural reforms of a Greece.

Even so the slowdown poses a big challenge to the government. There will be less revenue. The central bank governor has hinted at deeper cuts in the budget in order to retain market confidence. But further austerity measures may only weaken demand.

And that is the risk for Ireland: getting locked into a spiral of decline marked by falling revenues, a shrinking economy, and further spending cuts that only reduce further.

European officials are focusing on managing the next crisis in the eurozone but the current one is not yet over, despite optimistic words from some of Europe's leaders.

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