For nearly 15 years, the world watched with a mixture of fascination and awe as Ireland transformed itself from one of Europe's poorest countries into one of its wealthiest, earning itself the nickname the Celtic Tiger.

But the roar of yesteryear has turned to a whimper as the economy has been poleaxed by the global slump and a housing crash that has been worse than Britain's. Prices are down 30%, compared with around 16% in the UK.

So bad have things become that the Republic's third largest lender, Anglo Irish Bank, was nationalised last Thursday amid a crisis of confidence that saw large-scale depositor withdrawals. A day earlier, in an atmosphere described as febrile by analysts, the Irish government was forced to deny that it was seeking emergency help from the International Monetary Fund.

The deepening crisis in Ireland is underlined by the jobless numbers: unemployment is forecast to hit 400,000, or 11% of Ireland's four-million population, by the end of 2009.

Everywhere, the trappings of wealth and confidence are beginning to fade: Dublin airport used to be littered with private jets and luxury cars outside the terminal, but there are fewer nowadays as the country edges towards a new era of austerity.

At the Curragh racecourse, costly expansion has been put on hold to conserve cash, while from Limerick in the south-west, to Louth in the north-east, businesses are shedding labour and, in some cases, going into liquidation.

The rot has set in remarkably quickly: it is hard to believe that unemployment was just 4% at the end of 2007, or that GDP growth could plunge to minus 4% in 2009 against growth of 6% two years ago. "We are facing extreme short-term difficulties," says Rossa White, chief economist of Davy, the Irish stockbroker.

Last week, John Browett, chief executive of electrical goods retailing giant DSG, said that while the British recession was following past norms, the situation was "more serious" in Ireland.

Experts say that the severity of the Irish downturn is partly explained by the uncomfortable truth that the boom in housing and financial services (similar to what happened in Britain) has masked a number of underlying "structural" problems.

Fergal O'Brien, senior economist at the Irish Business and Employers Federation, says that wage inflation has been running out of control and today stands at 20% above the European norm. "Our wage costs have doubled in the last four or five years; that means we have lost our historic, competitive advantage and it will be a long, slow and painful process to restore it," says O'Brien.

For evidence of the consequences of wage inflation, look no further than Dell, the US computer company, which earlier this month announced that it was axing nearly half its 4,300-strong workforce and shifting its manufacturing operations from Ireland to Poland as part of a cost-cutting drive. The entire Irish production of laptops and desktop computers are being moved to Lodz, Poland's third largest city, where labour costs are two-thirds lower than in Ireland. Dell is not a two-bit player: it's Ireland's second-largest private sector employer, the country's biggest exporter and in recent years has contributed around 5% to GDP.

The sting in the tail was that in the past, Polish workers have flocked to Dell's Limerick factory for work and training. "Now they are taking our jobs," was a predictable response in some quarters, reflecting anxiety that a steep rise in domestic unemployment could lead to social tensions.

Ireland has been hit on another front: currency. The euro (which Ireland joined in 1999) has remained relatively strong against a plummeting British pound (25% of all Irish exports are to the UK) and a weakened dollar. The decline against sterling has had unforeseen consequences with Irish shoppers flocking to Northern Ireland in search of bargains. O'Brien estimates that "cross-border trade now accounts for between 2% and 3% of Irish consumer spending".

Newry Chamber of Commerce in Northern Ireland estimated that over Christmas at least 40% of its customers crossed the border to shop in its main retail centres - the Buttercrane and the Quays. The exodus prompted Ireland's finance minister, Brian Lenihan, to appeal to shoppers' "patriotism". But the call was largely ignored.

Jane Smith from Kilbarrack, a north Dublin suburb, who recently returned from a shopping spree in the north, said: "I probably paid 20% less there than I would have done in Dublin. Cleaning products, babywipes, headache tablets are all cheaper."

More importantly, Irish exporters cannot compete with their British counterparts, who have seen the pound devalued against the euro by 25% in the past year. O'Brien says that export trade is critical for the Irish economy as "80% of what we produce here is sold abroad".

The question that many people ask in the republic is whether the country can return to the halcyon days between 1994 and 2007 when GDP growth regularly touched an astonishing 10% a year. Alan McQuaid, chief economist at Bloxham stockbrokers says "almost certainly not" as Ireland in the 1980s had a lot of catching up to do.

"But we have a young, English-speaking and highly educated workforce and as long as we tackle our problems, there is no reason to suppose that we couldn't record 2% or 3% GDP growth annually."

Already Ireland is taking action to point the country in a direction that could herald a recovery in two or three years' time. Private companies are asking their employees to take a pay cut in view of harsh economic conditions. The upshot, if the medicine is more generally administered, will be to make Ireland more competitive, not only with western Europe, but with eastern and central Europe too.

One company that is applying the knife to pay is Independent News & Media, where the tycoon Tony O'Reilly has called on staff at his Irish operations to accept pay cuts of up to 10%, with employees on high salaries asked to make bigger sacrifices than those further down the pay scale. Elsewhere, the Irish construction industry is seeking to impose a 10% pay cut on more than 200,000 workers, telling unions that it's the only way to save jobs.

Just as pressing is a need to cut pay in the public sector to plug a hole in government finances that analysts fear could hit £14bn in two years. As government and unions draw battle lines for the struggle ahead, the Irish prime minister, Brian Cowen, last week said that a trade unionist was right to warn that the IMF could impose cuts on the public sector unless it agrees to freeze or reduce pay to employees, which has ballooned over recent years. It was that assertion that sparked fears, unfounded it turned out, that Ireland was looking for an IMF lifeline.

For now, Cowen is confining himself to working with unions in a bid to lop £1bn from the budget this year by persuading staff to agree to pay reductions.

But that will be a hard sell. Paul Sweeney, economic adviser to the Irish TUC, said: "There is no evidence whatsoever that cuts in wages lead to reductions in prices. In a small, open economy, inflation is largely determined externally. He added that the government should be held to account for stoking the boom by giving subsidies to property investors and cutting taxes.

However, structural issues must be addressed, says White, and sooner rather than later. "The problem is that we have relatively low taxes but high expenditure, and that is unsustainable. Something has to give," he says.

Low taxes were one of the bulwarks of the Celtic Tiger economy, luring foreign multinationals to relocate to Ireland and fuelling the expansion in employment that saw many qualified Irish professionals and other skilled workers return home after moving overseas in search of work in the 1980s and early 1990s.

Other factors were at play: it's generally agreed that membership of the EU was key to Ireland's ability to attract high-profile companies such as Intel, Google and Gateway. Many leading US companies use Ireland as a platform from which to operate in the European market.

One analyst says: "The rapid growth in the US during the 1990s, together with a resurgence of EU trade, was undoubtedly a major contributor to Ireland's success."

For a long time, Ireland was a net recipient of EU aid, which helped to modernise the country's infrastructure and educational system, while the adoption of the euro provided much needed currency stability.

Another critical reason behind the rise of the Celtic Tiger, say researchers, was the fall in the birth rate after the legalisation of contraceptives in 1979. That had an impact on the ratio of workers to those they financially support. The ratio fell dramatically in the 1980s and 1990s, so that by 2000 it had caught up with the European norm. That led to a seismic, demographic shift and a huge economic boost: from 1960 to 1990, the annual growth rate of income per capita in Ireland was about 3.5%; in the late 1990s, it jumped to 5.8%, well in excess of any other EU country.

But there is widespread gloom in Ireland today, summed up recently in an Irish Times article that said: "We have gone from Celtic Tiger to an era of financial fear with the suddenness of a Titanic-style shipwreck, thrown from comfort, even luxury, into a cold sea of uncertainty."

The same, of course, could be said about most other countries in the world, in the wake of the near breakdown of the international banking system and the need for governments everywhere to pump in billions to support depositors and to avert a global depression.

But as Tom Lynch, chairman of biotech company Amarin, says: "There was immense euphoria in Ireland up to 2007, perhaps unlike anywhere else. Now we all need to sober up a bit. We may not get back to the heady GDP growth rates we have had in the past, but that was when we were playing catch-up with the rest of Europe. There's no earthly reason, though, why the much maligned Celtic Tiger shouldn't get back on its feet."

Quite so.