From Greece to Japan to the US, countries across the world have been devastated by the banking crisis. But no economy has been wrecked quite so brutally as Ireland's. The erstwhile Celtic Tiger has seen its national income shrink 17% over the past three years – the deepest and swiftest contraction of any western country since the Great Depression. At the height of the long boom from 1990 to 2007, property in Dublin was worth more than in London. Since then, prices have dropped by around 40% – and are still sinking. At this rate, the country will soon hold the dubious honour of hosting the biggest property bubble and bust in modern history. When financiers joked in 2008 that the only difference between bankrupt Iceland and hard-up Ireland was one letter and a few days, they got it wrong – the mess the Emerald Isle is now in is so much worse.

And all the way down, Dublin ministers have promised voters that things are about to get better. Those emergency loans to the banks – that would sort it. These savage spending cuts – that would do the job. That decision to pretty much guarantee the entire banking system (with practically no questions asked) – this time for sure. Wrong, wrong, wrong. Like a body flung off the roof of a skyscraper, the Irish economy has just kept on falling.

They were at it again yesterday. The Irish finance minister, Brian Lenihan, promised voters that the national "nightmare" they have had to live with for the past couple of years would soon be over: "We are now bringing closure to that." He did not convince financiers, who have heard a similar form of words from Mr Lenihan every time he has brought forth another ill-advised plan. Even measured against the minister's previous gambles, though, this one is huge. Yesterday's bailout will include Anglo Irish, the property developer's favourite bank, as well as Allied Irish and Irish Nationwide – and it is set to raise the budget deficit from around 12% of national income to an astounding 32%.

When a country has gone bust in such spectacular fashion, the causes for its crisis are bound to range far and wide. Primary among them we might count an overreliance on property prices both for the feelgood factor and for public revenues. During the boom, Dublin cut income and corporation tax and relied increasingly on property taxes. As soon as the bubble burst, revenues collapsed. In other aspects, policymakers can claim that they simply stuck to the international orthodoxy for economic success – lure in foreign capital wherever you can, pursue your comparative advantages (which in Dublin, as in Reykjavik, came to be seen as finance) and remain open. But one of the lessons of what Gordon Brown once termed the first crisis of globalisation is that being open for business at all costs does not work well for small countries with homogeneous economies. And it really does not work with dozy policymakers.

As Pete Lunn of Dublin's Economic and Social Research Institute notes, the elite directing the Irish economy is more tightly closed than an oyster shell – so that the top civil servant in the department of finance would normally expect his tenure to be followed by a stint as chief central banker. Policymakers shrank from calling the property bubble a bubble until it had popped. And when it had burst, they accepted too easily the bankers' claims that they were merely short of liquidity rather than utterly bust. They did as the IMF advised and put into force some of the most savage spending cuts ever – with the result that nearly one in six workers is now unemployed, and that another economic downturn has begun.

Similarities exist here with other countries: just ask Gordon Brown. The big difference with the UK is that, as part of the euro club, Ireland cannot unilaterally devalue its currency. Its only road back to competitiveness is to cut workers' living standards. Which means that, whatever Mr Lenihan claims, the Irish economy has further to fall.