The Greek tragedy has become a European one, with disturbing lessons for small countries everywhere. But it is first of all a crisis of the European ideal itself. Those of us who believed that the EU was a great achievement of enlightened internationalism – breaking down national barriers, removing borders, increasing trade and communication – have been forced to think again.

Where is the Social Europe that social democrats like the former EU president Jacques Delors promised? The Europe of collective security in which no country would be left behind? Where democratic values, social solidarity and civic decency would be paramount?

It seems to have degenerated into a eurozone which has institutionalised the financial orthodoxies of the Great Depression run by pig-headed bureaucrats who believe that plunging countries into ever deeper debt will encourage compliance with disciplinarian economics.

Greece is being forced to suffer the economic equivalent of war. There is mass unemployment, the health service has collapsed, 60% of young people are without hope for the future, and there is growing absolute poverty of a kind unseen in Europe since the creation of the EU. But worse than this, they are offered nothing but an indefinite continuation of austerity.

There is no way that this would be tolerated in Germany, or France – or Britain for that matter, even though we aren’t in the eurozone. Would we willingly allow the EU to demand a change of government as a precondition of debt relief? No way, Jose.

The lack of democratic accountability in the European Union has always been a problem. But then, no-one ever envisaged a situation like the Greek crisis. We didn’t think political leaders behaved like this any more.

We should perhaps have realised that creating the bureaucratic institutions of a superstate without proper democratic underpinnings carried with it the dangers of a super-bureaucracy.

Hearing the way Greece was being bullied by institutions with little or no democratic accountability themselves, you begin to understand why countries like Norway and Iceland have always been so reluctant to join the European Union. They rejected the EU because they believed it that, whatever the trading advantages, it was essentially a bankers’ club. They feared that they would trade national sovereignty for control by a remote financial establishment without concern or interest in the wellbeing of the people. Last week it was hard not to agree.

Even the IMF has now admitted that austerity hasn’t worked and that Greece is simply incapable of paying any significant portion of its $340bn debts. The Greek economy has collapsed by around 30% as a direct result of five years of cuts and deflation. Yet Greece’s debt has risen from 130% of GDP in 2010 to 185% of GDP as a result.

It is economic madness. The only way for the Greek economy to recover is for the burden of debt to be lifted or rescheduled in such a way that the debt repayments do not hinder future growth. With a shrinking economy, the debts only get larger.

Greece is similar in some ways to one of those families in suburban America who were sold sub-prime mortgages. These were people who had no means of repaying the debts, but the banks believed that the government would eventually step in and save them from their folly.

Similarly, private banks lent irresponsibly to Greece before the crash believing that their money was safe because the country was now in the eurozone and could therefore never default. The banks were right.

What happened after the crash was that the institutions of the Troika – the EU, European Central Bank and the IMF – bailed out the banks and transferred their debts to the public realm. Only 10% of the billions in bailout fund went to the Greek people.

As a result, a crisis that was essentially the fault of the financial institutions has turned into a crisis of relations between debtor and creditor states. The irresponsible behaviour of the banks has been forgotten, and their sins have now been transferred to the debt-laden countries. Only, unlike people with sub-prime mortgages, Greece can’t just hand back the keys or go bankrupt.

If Greece were a private company it would be entering insolvency proceedings – a triage process by which debts are written off so that the company, or that part of it that remains viable, can recover. Greece is undoubtedly a viable country, but its ability to grow and service future debts is severely constrained because the debt burden is simply too great.

If Greece had been an independent country with its own currency, it would have gone through the sovereign equivalent of insolvency, which is devaluation. Iceland experienced a far greater financial crisis even than Greece when its three banks, Glitnir, Landsbanki and Kaupthing, collapsed in 2008 leaving the county with nominal debts of 300% of GDP.

What happened next was uncomfortable. The Icelandic krona was devalued by 80%, inflation leapt and a lot of people lost their jobs and their homes. However, the pain was of relatively short duration and the country returned to growth after 2009. It is now growing strongly.

Crucially, Iceland did not try to save the banks or its creditors. It let them go bust and then nationalised what remained. International creditors, including the UK government, which had bailed out IceSave, were forced to accept losses.

Also, the bankers were prosecuted and jailed while the government protected its social welfare infrastructure of free health and education. It also imposed capital controls, which it is now trying to unwind.

Iceland is not entirely out of the woods. It is suffering the predations of vulture capitalists who bought up Icelandic debt at knock-down prices and used their leverage to get commanding stakes in the newly privatised banks. Many Icelanders are in negative equity and will be for many years

But at least Iceland had options. Like Argentina in 2001, when it defaulted on its debts and returned to growth fairly rapidly, governments of independent countries have latitude to develop solutions which don’t simply impoverish their people and leave them with no hope of recovery.

By contrast, Greece has had to suffer what is called “internal devaluation”, which means trying to achieve the same result as currency devaluation by slashing wages and cutting state spending. Greece cannot print money or devalue its currency because it has lost economic sovereignty.

This sounds like the kind of account you would hear from Conservative anti-Europeans like Bill Cash or John Redwood, but this isn’t really a party issue. Tony Benn warned in the 1970s about the dangers of Britain losing economic sovereignty. Many on the left argued that the EEC, as it was then, wasn’t a community but an exercise in capitalist liberalisation and deregulation. The original Treaty of Rome, which founded the EEC, was based on free market principles of competition, flexible labour markets and rejection of state intervention.

Europe has been through many iterations since that time, of course. In the 1980s and 1990s we saw the debates about the Social Chapter to the Maastricht Treaty, which seemed to introduce a sincere commitment to social protection – limiting working hours and ensuring gender equality and holiday pay.

But crucially, the common currency itself was founded in the late 1990s on neoliberal principles. The so-called “stability pact” imposed a strict rule that governments could not run deficits of more than 3% of GDP – a rule that was, ironically, broken almost immediately by the German government coping with the financial strain of reunification.

The commitment to balanced budgets in monetary union was not mitigated by any fiscal union. There was no single European treasury or federal government with the authority to make financial transfers to member states, like Greece, that fared badly from having their currencies over-valued. Governments were forced to accept austerity and debt repayment as moral virtues. The result has been catastrophic.

Liberal pro-Europeans, myself included, have never been under any illusions that the European Union was in any way a socialist enterprise. The lack of adequate democratic structures in Europe has long been a matter of regret.

However, we were perhaps seduced by the illusion of internationalism: the visible removal of borders and boundaries and the harmonisation of currencies seemed to be bringing people together in a way that seemed noble and humane.

Like the European Convention on Human Rights, the EEC and the EU were products of the postwar era. Europe had been ravaged by two world wars, Nazism, communism and the Great Depression. Europe’s elites were determined to prevent any regression to the extreme economic nationalism of the Europe of the 1930s, which led to the Second World War.

The idea was to avoid national conflict in Europe by merging the economies in arrangements that would make war inconceivable. As late as 1995, the former German Chancellor, Helmut Kohl, said that the euro was “a matter of war and peace in the 21st century”. People no longer think like that, which is perhaps why we have had the imposition of what appears to many Greeks to be the imposition of a kind of economic warfare.

There is a profound irony in it being Germany that, above all the EU countries, appears determined to extract what might be called financial reparations from Greece. It was the imposition of unrealistic reparations on Germany after the First World War by the victorious powers that led to the financial collapse of the Weimar Republic and the rise of fascism.

Economists like John Maynard Keynes argued that imposing these rigid financial reparations was irrational and only impoverished Europe as a whole. After the Second World War, a different course was chosen. The victors rebuilt the German economy with Marshall aid from America. Germany’s unrepayable debt burden was lifted by the London conference in 1953, which Greece signed.

Now, half a century on, Europe seems to have forgotten all that Keynes taught us. The first priority for an economy should not be debt repayment, but growth – getting people back to work. Only then can a country raise revenue to make any debt repayments at all

Imposing austerity on a country already in depression is criminally irresponsible. It is profoundly undemocratic and arguably a violation of the human rights of the people of Greece. Regime change certainly is.

During the referendum, many commentators drew – and continue to draw – illegitimate comparisons between Greece and Scotland. Scotland is a far more advanced country, with GDP among the highest in the world, a highly educated workforce, prodigious natural resources.

Nevertheless, the Greek crisis means that an independent Scotland will have to think very carefully both about Europe and currency union. Many in the independence movement argued that Scotland needs to establish its own currency to avoid being placed in the same condition of dependency as Greece is to the bankers of Frankfurt.

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Scots also remember how the previous European Commission president, Jose Manuel Barroso,intervened during the referendum campaign to say it would “be extremely difficult if not impossible” for Scotland to join the EU even though it is already a member. The structures of power in Europe are no longer benign for small nations.

Not for the first time, we need to take another look at how Norway copes outside Europe. It looks as if the European dream is dead in our time. For Scotland, as for the Greek people in their referendum today, it might be time to learn how to say No.