The atmosphere in Ireland betrays a country sliding into a profound crisis. As a first step in halting this descent, at least two things must change. We must adopt a strategic rather than a tactical view of what is happening, and end policymakers' denial.

As in other countries that have failed to deal with financial bubbles and crashes, denial has been the stock response of the political classes. Two recent examples are the roadshowing of the view that Ireland is in recovery and the statements that recent bond auctions have been a success.

The recent GDP figures have destroyed these myths. We are still stuck in rescue mode while most of our peers are recovering. The GDP figures reveal that the policies for dealing with the crisis have been wrong. The objective should have been to restore growth, rebalance the economy away from construction and mend society after a decade of hubris. Instead the government, under the aimless eye of the opposition, has first tried to save the old banking system, and then to save the bond market. It hasn't tried to save Ireland.

In economics, denial is usually broken in two ways. Either financial markets inflict so much pain that policymakers are forced to change their minds, or an external force alters the dynamic. The IMF performed this role in Latin America and Asia in past decades . This is still unlikely in Ireland, but it would be welcome to see a figure with moral authority like the president open consultations with bodies like the OECD and Bank for International Settlement to establish the full range of policy options.

This would also shatter the illusion that there is no alternative to the policies of the past two years. All that has been achieved is the filling in of policy potholes, with no guidance as to where we are going.

This second, most necessary step is to outline what the recovery should look like and how it will change the economy and society.

The third step is to think the unthinkable. Would it be cheaper for Ireland to take the EU/IMF aid package? Could a nationalised AIB be run more effectively by the state? Is there scope to set up new banks in Ireland? Do we need to re-think the way Nama operates in view of falling property values and weakness in banking?

Having placed ourselves in the vanguard of austerity, we must examine whether we are simply shooting ourselves in both feet in that this programme will stunt short-term recovery, diminish long-term economic potential and trigger expensive social problems.

In addition, we need more recognition that Ireland is facing a balance-sheet recession rather than a more normal cyclical slowdown. One challenge is to enable households to make their liabilities (such as mortgages) tradeable or more liquid through tax credits or deferred liability arrangements. Such a move would help consumption, confidence and flexibility.

The wealth that remains needs to be put to work. Savers have been reluctant to lend to entrepreneurs but happy to gamble on property prices. Wealth now needs to be channelled into viable business opportunities. Ireland has never seen capitalism proper; this may be the time to start.

Finally there is some talk that an election will solve some of our problems. This can't be true. An election will not usher in a wave of new talents and ideas. There is unlikely to be substantive political change in Ireland in the near term.

Warnings of the crisis have been ignored, and falsehoods about the remedies have not been challenged. As time passes, the scale of the damage we have inflicted on ourselves will be more clear, especially as the rest of the world recovers. We need to think less about the blow-by-blow development of the crisis and more about the remaking of Ireland.

Michael O'Sullivan is author of 'Ireland and the Global Question' and co-editor with Rory Miller of 'What did we do right?'