The soup kitchen opens at noon but long before then the queues start to form in the hot Athens sun. A couple of streets away from where sardines, red mullet and squid are piled high in the fish market, those down on their luck line up. While elsewhere life goes on seemingly as normal, students, jobless people, single parents and pensioners swallow their pride and wait patiently. They get two meals a day, at midday and 5pm. This is what a depression looks like.

At first blush, Greece seems no different from any other developed country. People sit in the city centre cafes sipping their iced coffees; yellow taxis cruise the streets; the shops are open for business. But different it is, and it is not hard to spot the signs that this is an economy that has contracted by 20% since the downturn began three years ago and that it is still falling.

You don't need to know that spending in the shops is down by a sixth over the past year; it is obvious from the empty cabs and those shops open but with no customers. You don't need to know that the official unemployment rate is well above 20% and youth unemployment is nudging 50%: it's obvious from the young men idling on street corners and openly dealing drugs.

Greece is broke and close to being broken. It is a country where children are fainting in school because they are hungry, where 20,000 Athenians are scavenging through waste tips for food, and where the lifeblood of a modern economy – credit – is fast drying up.

It is a country where the fascists and the anarchists battle for control of the streets, where immigrants fear to go out at night and where a woman whispers "it's like the Weimar republic" as a motorcycle cavalcade from the Golden Dawn party, devotees of Adolf Hitler, cruises past the parliament building. Graffiti says: "Foreigners get out of Greece. Greece is for the Greeks. I will vote for Golden Dawn to remove the filth from the country."

As ever, it is economic collapse that is pushing politics to the extremes. Businesses that have not already gone bust are clinging on by their fingertips hoping the country's second election in two months will be a turning point. Not the moment when the economy starts to recover, because Greeks have seen enough and suffered enough to know that the slump will grind on through 2012 and 2013; instead, they are banking on the rest of Europe cutting Greece some slack for fear that a nation accounting for less than 3% of the eurozone's output could be the catalyst for a terminal crisis that will destroy the single currency.

"Things are getting worse," said John Milios, economics professor at the National Technical University in Athens, and a candidate for the leftwing coalition, Syriza, in the election. "The economy is in a devastating state mainly due to the austerity programme. Practically all the banks are bankrupt and there has been a very large redistribution of wealth in favour of the rich."

It is too late now to say that Greece should never have been admitted as a founder member of the euro, although there are those in Brussels, Frankfurt and Berlin who rue the day when European solidarity was deemed more important than economic common sense.

There are many cultural reference points for what has happened to the birthplace of democracy over the past decade: some call it a Greek tragedy, others say the austerity programme is akin to the torture of Sisyphus, the king condemned to push a giant stone to the top of the Hades hill only to find it slipping and rolling to the bottom each time he neared the summit.

But the best metaphor is Icarus, the boy who flew too close to the sun. The government in Athens used the cheap interest rates that came with euro membership to spend too much and borrow too much, all the time oblivious to the fact that the country was becoming less and less competitive in comparison with the rich countries of north Europe.

Crony capitalism, economic incompetence, and downright corruption left Greece vulnerable when the crash came. At the end of 2009 it emerged that the government had been telling lies about the size of Greece's budget deficit, and the financial markets no longer considered Greek debt to be all but the same as German debt. Athens got its first bailout in May 2010, a second in February this year. But on both occasions strings were attached: cut wages, cut pensions, cut public spending, privatise the economy, embark on structural reforms.

Austerity has been a failure, for Greece and for the rest of the single currency. The idea was to end the recession quickly and prevent the contagion spreading to the other 16 members of the club. Neither has happened.

"There is precisely zero chance of austerity working," said Yanis Varoufakis, once a speechwriter for the former socialist prime minister George Papandreou, now an economics professor in the US. "It is the same as thinking you can escape from gravity by waving your arms up and down."

Varoufakis is scathing about how the crisis has been handled. "Europe's made a mess of Greece for the past three years. Those responsible will go down as the biggest idiots in the history of economics."

There have been domestic and political ramifications of the failure to tackle Greece's problems effectively. Internally, there has been a loss of support for the mainstream parties thought responsible for the economic collapse. Externally, the belief that Greece will be merely the first eurozone domino to fall has led to pressure on Ireland, Portugal and, recently, Spain.

The strength of support for Syriza's anti-austerity message in the inconclusive election held shocked the Greek and the European political establishments. Despite attempts to portray Syriza as the party that will propel Greece towards an exit from the eurozone – something 80% of the population oppose – polls suggest that support for the charismatic Alexis Tsipras, leader of Syriza, has held up.

"After the elections of 6 May we can see that a large fraction of the population has hope for the first time," Milios said.

Tsipras is adamant that he doesn't want to return to the drachma. He wants instead to renegotiate the terms of Greece's bailout, with the country's creditors agreeing to lower interest rates on debt repayments, more time to hit deficit reduction targets and money from Europe's structural funds to back growth. In the game of political chicken being played between Athens and Berlin, Tsipras believes Angela Merkel, for all her tough talk, will blink first.

Alex Jacovides, chairman of Genesis Pharma, a company that imports drugs for the Greek healthcare market, said: "We need a compromise for the benefit of Europe, an extension of the memorandum [the bailout agreement] because people are feeling the pressure and cohesion is at stake.

"People are not all like the Germans. There is a limit to what Mediterranean people can accommodate. Greece was living beyond its means for a number of years – this has to stop. But it can't happen overnight. It has to be a step by step approach. Who's going to invest in Greece when it's going down so rapidly?"

The company has been hit by a triple whammy: a 50% drop in demand from a contracting economy, a 14-month delay in being paid by the government, and the €170m loss it took on the bonds that it accepted as payment from the state but which were subject to a 70% write down as part of February's bail-out. "We can survive a few more months" said Jacovides, "but not much more than that."

He added, however, that he wanted the next government to be pro-Europe and pro-euro, but insisted that this was not just a crisis for Greece. "This is an inflexion point for Europe. We have to decide whether we take the federal road or go back to single nations. We need time, support and the realisation that if Greece fails it will be the end of Europe as we know it."

Thus far, there has been precious little sign that Germany's chancellor is prepared to soften her line. And sympathy from other quarters has been in limited supply too.

Christine Lagarde, the managing director of the International Monetary Fund, provoked fury when she said in a Guardian interview that she had more sympathy for poor children deprived of a proper education in Niger than she had for those guilty of not paying their taxes in Greece.

No one in Greece would deny that tax-dodging is a serious problem. What they objected to was the failure of Lagarde to make a distinction between those who pay their full whack – the less well-off wage earners – and the middle class, self-employed, professionals and super rich who can find ways, legal and illegal, to minimise their tax liabilities. There are those, too, who think that the austerity imposed by the troika — the IMF, European Central Bank and the EU — has made matters in Greece worse, not better.

"The government and the troika took a Greek recession and turned it into a Greek depression," said Thanasis Maniatisan, an economics professor at Athens University. "It is a great humanitarian crisis, similar to that suffered in advanced economies during the 1930s. There is no light at the end of the tunnel."

Not everybody agrees with this bleak assessment. One senior banker, speaking anonymously, said that the restoration of political stability could lead to the return of the €80bn removed from bank deposits since the start of the crisis. Some of the money has fled overseas, some has been used by the newly impoverished to maintain living standards, some is being kept under the mattress in case the banks go bust.

A return of even a fraction of this capital would provide the banks with scope to lend more money and so finance a slow recovery, the banker said.

Dimitris Tsigos, founding president of the Hellenic Start-up Association and founder of a software company, says that Greece has plenty of things going for it: a well-educated workforce, plenty of sun that attracts tourists and can be a source of solar power, and a thriving biotechnology sector. But he believes the country needs a clean break with its bad old ways.

For many years, Tsigos said, graduates aspired to working in a public sector that was expanded to cater for them. "This vision has collapsed with the crisis and now people have to make up their minds what they will do. Emigrating is one option. To stay here and fight is another. Doing that in a zero liquidity environment is challenging but that's what we are trying to do."

The crisis, he says, has hit the poor, the wage earners and parts of the middle class but not Greece's oligarchs, ship owners and bankers who control the media and have had close links with the parties of the centre-right and centre-left that have dominated Greek politics since the mid-1970s. "Greece is a country governed by a group of gangsters. Either the Greek people will kick the gangsters out or they will have the fate they deserve."

Defence spending, where corruption has been endemic, said Tsigos, has so far escaped the swingeing spending cuts imposed on health and education. "Corruption is everywhere. You must think of a Latin American or African model to understand Greece."

This, then, is Greece as it faces its second recent election: a country with dysfunctional politics, a crippled economy and creditors rapidly running out of patience. There are no good options, only bad ones.

One posited solution is to leave the euro and return to the drachma. This would intensify the slump in the short term. The National Bank of Greece, a commercial bank, estimates that output could fall by a fifth and unemployment could rise to 34% of the workforce. But there are those who believe that there is a chance that a cheaper currency and a debt default would, as was the case with Argentina a decade ago, offer the chance of recovery.

Leonidas Vatikiotis, a leftwing academic, says leaving the euro is a prerequisite for recovery. It would, he said, have to be accompanied by nationalisation of the banks, capital controls and debt default. "There is meltdown in the economy. Nobody pays anything. Businesses don't pay their suppliers. Suppliers don't pay their taxes. The solution is the overthrow of austerity policies. Greece has been an ideal laboratory for the most brutal neo-liberalism."

This, though, is still a minority position. Stefanos Manos, leader of the small Action party, says Greece must remain in the euro and favours even more radical structural reform than proposed by the troika. "In terms of shrinking the state, the memorandum is very timid. I would do more."

Varoufakis says the comparison with Argentina does not stack up, because Argentina had retained its own currency while pegged to the US dollar, and there was strong global demand for its commodities after it devalued the peso. He says Greece should default within the euro.

As the debates rage over whether Greece should be in or out and whether it should stick to its austerity plan or not, one thing is clear: the country is perilously close to the edge of economic and social catastrophe.

Sofia Argyropoulou owns a printing house that has specialised in upmarket books since it was founded by her father in 1956. There have been bad times before, she says, especially the period of the military dictatorship in the late sixties and early 1970s when her father ran the printing machines without paper "just to hear them".

"What I want is work," she said. "I don't care whether we have the drachma or the euro. What matters is to have work." Like many other Greeks she knew that the boom years were just too good to be true. "But I couldn't believe we were going to be in this position. People are sitting on their money because they are afraid."

Argyropoulou cut her workforce from 14 to seven and moved into smaller premises, but she said she was still losing money. "We can survive for another six months. After that I will use my savings to close. I will give everybody what I have to give and say goodbye."