We're being offered, at present, one of those things that economics so rarely does offer us. A near controlled experiment through which we can see the results of different policies being applied to the same circumstances.
Leave aside, for a moment, how Iceland and Ireland both got there: they're both in much the same position. Entire countries essentially bankrupted by the debts of the banking system. But what each are doing is very different indeed. Iceland has, in so far as a country can, declared bankruptcy, allowed the currency to collapse, told its creditors that there just isn't any money and is waiting to see what the markets allow to happen next.
Ireland is locked into a currency regime, the euro, and so cannot change its interest rates or the value of the currency and is thus attempting to, well, do something within those strictures. As a result of political pressures within the EU it's not being allowed to tell creditors they can go sing for their money.
Both countries have large economic slumps, this is true. But what really matters is how this all pans out over the next decade or so.
One of the things that's terribly hard to explain to people is the way in which market based systems deal with failure. It can be brutal and harsh, certainly, but the most distinctive part is that market systems do in fact recognize failure. *Shrug*: so there's no money left. Well, just looks like those who lent the money are going to have to lose some or all of it then, doesn't it? Rather than the non-market usual response of deperately trying to find the money from somewhere: anywhere at all in fact.
As I say, both Ireland and Iceland are in roughly the same situation: there ain't no money left. Iceland has defaulted, something which certainly has short term effects. Ireland probably should default but isn't being allowed to.
I have a very strong suspicion that it will be Iceland that is better off in a decade's time, not Ireland. For however much creditors don't like it, it really is true that when there's no money then there is no money. Better to, as market systems tend to do, recognise this and then move on, rather than try and spend a decade or two rootling through every mattress in the country to try and find what isn't there.
After all, this is hardly the first time that a sovereign state has said "Oops, all the money's gone" now, is it? As, to take a short list, Russia in 1991, then 1997-8, Argentina in 1982, 90 and 2001, Brazil and Chile both in 1983, Ecuador in 1982, 99 and 2008, Uruguay in 1983, 87, 90 and 2003, Venezuela four times since the 1980s and, umm, Greece for fully 50% of its years as an independent country, show us.