JUST when the Irish economy begins to show definite signs it is starting to emerge from the abyss of the past year and a half, the fall-out from the Greek tragedy threatens to undermine all of the painful (and painfully slow) progress made.

It's clear the financial markets are very sceptical about Greece's ability to swallow the tough measures required, as well as harbouring doubts that the likes of Portugal and Spain have the ability to post the necessary economic growth to help resolve their budget deficit problems.

And given our own considerable budgetary problems, the risk of contagion for Ireland has been the subject of much speculation and prompted a rise in recent days in the so-called 'spread' (or premium) that investors demand to hold Irish government bonds.

The Irish economy is in better shape than not just Greece (which would hardly be much cause for celebration) but also Spain and Portugal. The government has moved quicker to address the massive budget deficit; economists believe our growth prospects are better; there are clear signs of restored competitiveness after the bloated final years of the Celtic Tiger; the Irish workforce is more flexible and better educated and our industrial base is much more modern.

All of the latest data – tax returns, consumer sentiment, retail sales, business confidence indicators – suggest the Irish economy has not just bottomed out but is tentatively beginning to grow again. We are getting some credit for that internationally, particularly in the US where there is a perception that Ireland – whatever about the mistakes made that got the country into the mess originally – has taken the necessary tough measures to address the problem and is different from the Mediterranean countries.

But when push comes to shove will the markets differentiate or will they adopt a plague-on-all-your-houses approach to a Eurozone that they see as containing serious weaknesses?

International markets are capable of differentiating between countries – at the beginning of the last decade, the crisis in Argentina had very little impact on sentiment towards neighbouring Brazil, despite some initial contagion.

But at a time of panic, such rational logic can go out the window particularly if there is a financial killing to be made by hedge funds.

The crisis has prompted speculation that Greece may be forced to leave the Euro, but other observers play down the potential for the Eurozone to begin breaking down. Unravelling a currency union would be extremely difficult – for starters just think of the logistical difficulties of having to return to states' old currencies – so comparisons with the fall of the Gold Standard in the 1930s, the problems with the old European Exchange Rate Mechanism and the breaking of Argentina's exchange rate link to the US dollar are probably overstated.

A more plausible worst case scenario is that bad news from the likes of Greece, Spain and Portugal damages sentiment towards Ireland – and hence makes it more expensive for the NTMA and Irish banks to borrow money when they need to re-enter the markets to do so. There is also a worry that if the crisis were to continue beyond the short term, it could potentially damage already fragile consumer confidence here.

But against that, the declining value of the Euro is a huge boost to Irish exports, so crucial to the recovery in our economy. There are also strong signs that the global economy – the US, Asia, Latin America, Germany – is recovering quite quickly and events at Greece are unlikely to derail that. Even the likes of US economist Paul Krugman, who believes Greece will default on its debt and end up leaving the Euro, don't believe Greece is either big or connected enough to cause the financial markets to freeze up the way they did two years in the wake of the collapse of Lehman Brothers.

It does seem obvious that the EU was too slow in reacting to the crisis in Greece. And even after the belated €110bn EU/IMF rescue package, there are calls for a more proactive approach. Proposals such as the European Central Bank effectively printing money by buying government debt or fiscally stronger Euro states bailing out weaker neighbours with aid have been proposed. Neither approach seems particularly likely and the danger is that they might act as a disincentive to the kind of reforms and restructuring that Ireland has had to do in the last 18 months and the likes of Greece and Portugal now need to implement.

As one senior economist pointed out to the Sunday Tribune this weekend, the problems in the Eurozone area are national problems. Only national policy makers can fix those problems. The ECB can't address the huge hole in Greece's tax returns or the structural problems in the Spanish or Portuguese economies or the narrowness of the tax base or inflated wages in Ireland. Only sovereign governments can.

And unless that happens, the Euro will probably continue to be the subject of market speculation in the long term. And as the famous economist John Maynard Keynes said about that:?"In the long term we're all dead."

If it's all Greek to you: The crisis explained

Crisis? What crisis?

The international markets have a problem with a number of Eurozone countries but standing out like a sore thumb is obviously Greece. The markets don't think Greece will make the necessary reforms to sort out its budgetary mess and there is a worry the country will default. This in turn has raised questions about the Euro-zone's ability to protect its members and prompted speculation about other countries with less severe problems – Portugal, Spain, Italy and Ireland.

What's the worst case scenario?

Some eminent economists believe that without bold action from EU leaders – such as the European Central Bank buying government debt as the US Federal Reserve does with US Treasury bonds (effectively printing money) or aid being given to weaker Eurozone countries – Greece will ultimately have to leave the Euro, possibly triggering crises in other countries. But other economists consider this highly unlikely, likening it to California or Texas leaving the dollar.

How might it impact on Ireland?

Although Ireland is credited with making genuine efforts to sort out its budgetary mess, the degree of panic in the markets has created a serious risk of contagion to countries perceived as having weakness. The interest rate the Irish state would have to pay to raise money from the bond markets has risen as a result of this uncertainty, although as of now the NTMA, which manages our debt, has no need to borrow money. There is also a fear that if the crisis continues, it could damage the recovery in European economies.

What can Ireland do?

Very little about the Greek situation, but it is vital the country continues with the plan to reduce the government deficit (the gap between spending and revenue) to 3% of our national income by 2014. If there is any slippage in this, any chance we have of being decoupled from the likes of Greece, Spain and Portugal will disappear. The fall in the value of the euro is good news for Irish exporters.