‘The state is bankrupt, let’s face it,’ an editorial in the Greek daily Kathimerini concluded the day after a museum in ancient Olympia – left virtually unguarded owing to personnel cuts – was robbed in broad daylight. The furore over the country’s economic troubles has deflected foreign attention from the collapse of the political system, though it’s causing Greeks more anxiety than the disastrous drop in their standard of living. They know it has ceased to function and that it cannot be expected to bring about an economic recovery. Opinion abroad is that Greece has too much democracy and not enough of an economy and foreign creditors are determined to redress the balance. The terms of the latest bailout clearly recognise the critical condition of the state, but insist nonetheless on a reform programme whose aim is to squeeze as much money out of it as possible for debt repayment. According to the Independent of 19 February, ‘Greece will become an economic – and to a large extent a political – colony of Germany and its allies.’

Here is a sample of what to expect. Forced in February to accept a cut of 22 per cent in unemployment benefit – reducing it from €461 a month to €359 plus 10 per cent for each child – the government sought to stagger the cut to mask its severity. The troika, as the representatives of the European Commission, European Central Bank and International Monetary Fund are known, insisted that the minister of labour implement the cut without delay. When he asked for time to consult his cabinet colleagues, he was told this would hold up the disbursement of funds for the latest bailout. The cut was announced the same day.

The government, devoid of legitimacy and public support, remains in power only because of its role in the continuing negotiations, which are largely fictitious since it is obliged to accept the troika’s demands. The fabric of democracy is unravelling. The unelected prime minister, Lucas Papademos, is a former banker whose only qualification for the post is that he ‘knows how the market works’. Politicians avoid public places for fear of being pelted with yoghurt and eggs, enter and leave parliament between phalanxes of police, and are besieged by demonstrators threatening to immolate them in it. Students parading in Athens on a national holiday last October turned their heads away from the official stand in contra-salute, while in Thessaloniki crowds broke up a military parade, forcing the elderly president of the republic to beat a hasty retreat. Politicians of all stripes – with the exception of the Communists, who have never enjoyed power – are called ‘traitors’ and ‘thieves’.

To make their voices heard, Greeks are turning to the politics of the street: raucous demonstrations that test the capacity of the police to keep control. When the centre of Athens was set alight during demonstrations in February, the head of the Federation of Police Officers complained: ‘The police cannot fill what has become a political void.’ These events will have reminded the older generation of the prelude to the 1967 coup that brought seven years of military rule. Bailout or not, the political system is all but finished.

The country is on the verge of radical social change. The political reform and concomitant economic growth that began in the mid-1970s encouraged the formation of a new middle class, which steadied the political pendulum by filling the gap between the warring left and right. Education rather than capital accumulation lifted people into the middle tiers of the social pyramid and, since the public sector is the main employer of the professional classes, most of them are dependent on the state for their status. The present crisis threatens to wipe out this class, clearing a space for a renewed confrontation between irreconcilable extremes. Radicals on both sides have rejected the austerity programme. ‘Those who govern us are not Greeks,’ cries Alexis Tsipras, leader of Synaspismos, the second largest Marxist party. ‘We are here to say no to what they want to impose on us,’ echoes Georgios Karatzaferis, leader of Laos (Popular Orthodox Rally), the party of the far right. (Laos won nearly 6 per cent of the vote in the 2009 elections.) Aleka Papariga, leader of the Communist Party, the oldest and third largest party in the country, perceives the dawn of a class struggle that will take Greece out of the EU and Nato and put it on the path to socialism. Support for the Marxist parties was around 10 per cent in the 2009 elections; it can only increase.

This tale of political malfunction starts with the collapse of military rule in 1974, the last act in a fratricidal conflict between left and right dating back to the 1940s. The legacy of the civil war that followed the Second World War was a rightist police state that lasted until the mid-1960s, when popular unrest encouraged a move, led by the charismatic Georgios Papandreou, to redress the political balance through the ballot box. The regime panicked and in 1967 the ‘Colonels’ took over. They were finally seen off in 1974 after a violent confrontation with university students. The period that followed was known as the metapolitefsi (‘change of political system’). ‘Greece belongs to the West’ – an insinuation that the only alternative was the East – was the slogan of Konstantinos Karamanlis, the first prime minister and founder of the right-wing New Democracy Party, who steered the country into the Common Market. The opposition was led by Papandreou’s son, Andreas, who founded the Panhellenic Socialist Movement (Pasok). Andreas, who had a talent for rousing oratory bordering on demagoguery, positioned his party on the left and called for Greece to leave Nato and the Common Market. ‘Change,’ he demanded: ‘Here and Now!’

Papandreou’s anti-West posture was dropped when Pasok came to power in 1981: Greece became a full member of the Common Market and stayed in Nato. A year later Papandreou made two fateful requests of Brussels. The first was that Greece be allowed ‘adjustment time’ to implement EEC directives, the second that it be given generous financial assistance. Brussels rejected the first request, but in practice never insisted that Greece meet its obligations on time. The request for development funds, though, was accepted and the taps opened. Pasok flung the money indiscriminately at every sector of Greek society, though for the first time in modern Greek history it was the countryside that was favoured thanks to the Common Agricultural Policy. This period brought the end of the police state and the return of the Communist Party to legality. Reforms in education, health and local government came in ‘clusters’ – a favourite Pasok term. Pasok introduced social welfare measures for the poor, the old and the disabled. It championed women’s and workers’ rights, and forged ties with the trade-union leadership, which secured for an aristocracy of state workers the sort of wages, pensions and working conditions that have fed the caricature of an overpaid, under-performing Greek workforce. It had been the aim of the European aid programme to lift the standard of living in Europe’s South and Greece benefited immensely. By the end of the 20th century it had joined the group of higher income states in the EU, and in 2010 was ranked 22nd in the UN Human Development Index – just ahead of Britain. However, its prosperity was built on the shifting sands of debt. Greece had created a welfare state without a material foundation. By the time Andreas Papandreou died in 1996, his party was exhausted, its only remaining aim being to cling to power. There was corruption at every level of party and state; the treasury was empty, the country’s debt bloated.

In 2001, under Papandreou’s successor, Kostas Simitis, Pasok executed un grande colpo to bring Greece into the Eurozone. To meet entry requirements it had to reduce its sovereign debt to below 60 per cent of GDP, which was when Goldman Sachs made the politicians an offer they couldn’t refuse. The bank would advance Greece €2.8 billion – in dollars or yen – and the state would commit to pay it back, in euros, ten years later. This currency swap is not classified as a loan but as a trade, which means it doesn’t have to be made public, and neither does it count as part of the country’s debt. To sweeten the deal, Goldman Sachs used fictitious currency exchange rates to increase the amount Greece received. The bank was paid one million euros for its services, plus interest, before it sold the debt back to the Bank of Greece in 2005. In similar deals, the government borrowed against future income from airport fees, lottery proceeds, highway tolls and railways. These were classified as sales, not loans, and again were not counted in the national debt. A good deal of this money went to finance the 2004 Olympics.

This was a time when tax dodging became a popular sport in every part of Greek society. Those who didn’t play themselves tolerated it. Traders, shopkeepers, craftsmen and professionals avoided issuing receipts for goods and services; until recently they were allowed to assess their own tax liability in the knowledge that their declarations were unlikely to be scrutinised. To this day Greeks press a fakelaki (a small envelope stuffed with cash) into the hands of state-employed doctors in order to ensure good treatment. VAT, which currently stands at 23 per cent, is widely avoided, and so are worker benefits that add as much as 80 per cent to labour costs. Tax dodging at the popular level has deep roots in the culture and is not easily overcome.

Some things are changing. Cash registers and numbered receipts have been introduced in the past couple of years, obliging people to collect and produce receipts to meet tax regulations. Hundreds of thousands of bags filled with receipts have arrived at tax offices, where no further notice is taken of them. The plan now is to introduce smart cards to record all transactions digitally. Meanwhile the real beneficiaries, as so often, are in the upper income brackets, but the ossified state of the judiciary means that tax evasion at this level effectively enjoys legal protection. Despite repeated government promises, there is no expectation that even a fraction of the tax owed will be recovered.

In 2004 the leadership of the two major political parties, Pasok and New Democracy, was taken up by descendants of their founders: respectively, George Papandreou, son of Andreas and grandson of Georgios, and Kostas Karamanlis, nephew and namesake of the first metapolitefsi prime minister. Karamanlis’s time in office between 2004 and 2009 was dominated by a series of scandals, while the downward slide of the economy accelerated. ‘Leave it for later,’ he reportedly instructed his minister of finance, who had recommended taking appropriate measures. In the meantime, the government faked its budget figures. When the storm burst in 2009, Karamanlis dissolved parliament two years after winning an election – a bonus for the various politicians embroiled in scandals, since there is a statute of limitation on ministerial responsibility barring criminal prosecution once two regular sessions of parliament have passed.

When Karamanlis resigned, he finally admitted the cupboard was bare. George Papandreou recklessly claimed the crisis had been exaggerated to frighten the electorate; the financial problem, he said, could be solved by familiar nostrums: efficient tax collection, elimination of waste in the public sector and higher taxes for the wealthy. For everyone else he pledged to raise wages and pensions and to lower taxes. Pasok won the 2009 election, but when Papandreou discovered on taking office that the kitty was empty, he asked Brussels for help. In the months of inconclusive negotiations that followed, Pasok continued to play down the severity of the crisis and to promise early relief. Scandalmongering was replaced with the drama of ‘negotiations with our partners’ staged in one European capital or another, and the comings and goings of the troika’s representatives.

Without any ideas of its own for a way out of the crisis, the government was obliged to accept the terms set by ‘our partners’. Any sensible plan for sustainable economic recovery must include measures for growth – in other words, investment. The terms set by ‘our partners’ are inimical to growth. When they speak of a return to the market, they mean the financial market and more borrowing; to do that Greece must first pay its present debt. So the government is entirely taken up with negotiating the terms of its debt repayment, working out how much can be squeezed from the various branches of the economy – and draining off what little money might have been available for investment.

The most vulnerable elements of the population are the hardest hit, pensioners especially. When inflation is taken into account, the loss for pensioners approaches 50 per cent. Wage earners in the public sector suffered similar losses. The minimum wage, initially reduced to €750 a month, is now to be cut by a further 22 per cent. Since the cheapest rents are over €200 a month, homelessness is bound to rise. There are plans to dismiss 15,000 civil servants; many workers in the private sector have already lost their jobs. Unemployment stands at nearly 25 per cent, and is almost twice that among under-25s. A property tax introduced in 2009 wasn’t collected because the authorities couldn’t manage it. Last year, homeowners were asked to pay the tax, backdated to 2009, in one go. In an ingenious move, the state electricity company was given the task of collecting the tax, so that it could threaten to cut people’s power supply in the event of non-payment.

The results so far have been catastrophic. GDP fell by 12 per cent between 2009 and 2011, and is expected to shrink by another 6 per cent this year. More than a quarter of the population is below the poverty line. ‘No one believes that Greece can fix its finances and reform its economy under the austerity programme imposed by the terms of the rescue,’ Michael Schuman wrote in Time last September: ‘the adjustment demanded is simply not politically, socially or even mathematically possible.’

Pasok tried for a year to persuade organised labour and professional associations to accept the austerity package. When large numbers of people again took to the streets, Papandreou called for a referendum on the proposed measures. No one was more annoyed at this histrionic appeal to the people than ‘our partners’, who forced Papandreou to resign and replaced him with Papademos. His government is an elaborate stage prop in the continuing theatre of ‘negotiations’. His cabinet is made up of the tainted politicians from the ruling parties who brought the country to the edge of the abyss. A coalition of the same parties in parliament rubber-stamps the measures the troika demands while proposing to compete for a ‘fresh mandate’ in elections planned for April. Recent opinion polls show that more than 60 per cent of the electorate wish a plague on both their houses. The choice could hardly be less appealing: vote for the same crew, or don’t vote at all – an incitement to violence if ever there was one.