As far as European competitions go, the Old Firm seem pretty much at the same level as the English teams that are qualified for the UEFA Cup. However, they're different beasts, and what makes a good team in Europe might not be enough to league play. For instance, in Europe, Celtic's abysmal away record is compensated by their home ground results, and that still makes them a hard team to play against in knockout competitions, but in league play losing or drawing all away matches is the recipe for a bottom feeder, not a championship contender.
For all that matters, I think you are over-evaluating the average level of the Premiership. While the top 4 teams might well be on the top 5 sides in Europe, the UEFA spot sides are distinctively average when compared to Spain, Germany, or even Italy, and under that, the less said the better. Hell, Sporting took down Boro and Newcastle in 2005... They were average teams, only covered with a lot of glitter from being in the same league and Arsenal / Chelsea / Liverpool / ManUtd.
This reminds me of those games where even average players in real life are superstars if they are in the Premier League, and the only good players are on Spain or England - for instance, half the Porto 02-04 team was worth peanuts on most games, but they magically improved once they arrived on Chelsea or Barcelona
