Leading article: The time has come for Dublin to change course

The fate of Ireland has become a battle of wills between the Irish government and the markets. Dublin hopes to convince investors that it will do what is necessary to bring its borrowing under control. The financial markets do not believe that such a promise is credible with the cost of Dublin's decision to rescue its insolvent banking sector continuing to spiral upwards and the Fianna Fail-led coalition government looking increasingly unstable. Global investors have, in effect, refused to continue lending to the Irish state.

Until recently, the eurozone bloc was backing Ireland in its showdown with the markets. But European governments are now said to be privately urging Ireland to access the €750bn Financial Stability Fund established by members in May. Dublin insists that it can still win back confidence, pointing out that it does not need to tap the international bond markets until the middle of next year. But it should change course.

Dublin should do so for the sake of the Irish population. Austerity in Ireland is inevitable for the next few years. But slashing public spending at such a desperate rate at a time of high unemployment is economic masochism. Accessing the bailout funds will allow Dublin to retrench in a slower and more humane fashion. At the moment, the living standards of the entire Irish public are being driven down ruthlessly to pay for the mistakes of wealthy bankers and greedy property developers. That was always morally wrong. It now appears to be economically unsustainable too. There are some in Ireland who fear that the economic pain being inflicted by the government could trigger a wave of mortgage defaults, which would push Ireland's banks still further into insolvency. Austerity at this pace could prove self-defeating.

Yet the wider eurozone needs to change its approach too. German politicians, stewards of the bloc's largest economy, argue that the root of this crisis is budget indiscipline by member states. And they are busying themselves drawing up new rules that will impose fiscal restraint on governments. But this is a fundamental misdiagnosis of the problem. While the governments of Greece, Portugal and Italy over-borrowed, Spain and Ireland did not. Dublin and Madrid were running budget surpluses before the global financial crisis struck in 2008. The root of their problem was private debt, not public debt. The crisis in Ireland and Spain stems from idiotic lending by banks, which pumped up housing bubbles. Unless new rules address the destabilising effects of eurozone credit flows, they will be pointless.

Something needs to be done to curb the excesses of banks across Europe too. It is the dirty secret of politicians in Germany and France that the eurozone bailout fund was set up, in part, to stop banks across the continent (including here in Britain), which hold eurozone public and commercial debt, from suffering enormous losses and setting off a new banking crisis. Furthermore, the peripheral European nations such as Greece and Ireland need some prospect of being able to grow in the coming years (in the absence of an export-boosting currency devaluation) if there is to be any incentive for them to remain in the single currency over the longer term.

Ireland appears to have gone past the point of no return. The only viable way forward is through the assistance of the Financial Stability Fund. But Portugal, Spain and Italy could be next. Eurozone finance ministers need to put their moralising to one side when they meet in Brussels today and work out how to extinguish this still-raging fire.