Can Greece find a way out of the 'dead end'?

When Daniel Howden was last in Greece seven years ago, optimism was everywhere. He returned this week to find a country beset by violence and gloom.

The sun rose to reveal bodies strewn about Syntagma Square, some laying on benches and others sleeping in flower beds. The pavements were scattered with discarded placards and broken glass. Hours earlier, the approach to parliament had been a rough sea of flags, the air heavy with sweat and chanting. A banner hung from one of the lampposts captured the mood: "If this is a dream I don't want to wake up."

It was June of 2004 and the Greek football team had just won the European Championship in one of the unlikeliest sporting triumphs anyone could remember. The celebrations had been euphoric, almost visceral – a national convulsion. The Olympics were coming home the next month and Greece was on a high.

Seven years on and I am back in the same square with many of the same people it seems. The flags are there and to a non-Greek speaker the chants sound the same. But the mood is rancorous. I cannot escape the feeling that I am looking at a beloved country through a glass, darkly.

My professional life in Greece ended after the 2004 Olympics in Athens. That year, in which persistent worries over delays to preparations gave way to international recognition of a worthy return of the Games to their original home, was the high point.

Coming back now, as Greece's catastrophic finances threaten to have it cast out of the euro and with popular fury at austerity measures peaking, I have the queasy feeling of someone who attended the wedding and has returned for the funeral.

Over the next four years, Greece's national debt is projected to rise to 200 per cent of GDP; the primary deficit – how much more the country spends than it earns before interest on its debt – is still climbing despite a year of deep cuts; unemployment is headed towards 20 per cent and the economy is still shrinking. The word that you hear most often in conversation in Athens is "adeiexodo" or "dead-end".

If a €12bn (£10.6bn) loan is not received from the European Union and International Monetary Fund (IMF) in the next fortnight the country will go bust in July. If it does come and is followed by another bailout of €110bn then there may be time to fudge some kind of "soft landing" that prevents the Greek crisis from contaminating the rest of the eurozone's heavily indebted nations. No one here believes that a second bailout will achieve much more for Greece than buying time; many believe it will make matters worse.

Hospital dispensaries have started to turn patients away as the drugs have run out; many public salaries remain unpaid. Homelessness, which was practically unheard of among Greeks, has risen to 20,000 nationwide and psychiatrists manning a Greek version of the Samaritans say that crisis-related suicides have gone up dramatically.

This year, the games in Athens revolve around blame: private-sector employees blame public-sector bloat; civil servants blame tax-dodging professionals; the unions blame banks, oligarchs and neo-liberals at the IMF; almost everyone blames the government, which, in turn, blames the international media, financial markets and the opposition. Almost no one blames themselves. I did find one man, though – a pensioner who stood up to talk to the popular assemblies that have become a nightly ritual in Syntagma Square, prompting comparisons with the discussions in the ancient Athenian agora.

He apologised to the young people present and to young Greeks everywhere. He said that his generation had failed to build on the return of democracy since 1974, had wasted their entry into the EU and had "stolen the future".

Among the assembly, which had Greeks of all ages and political persuasions, there were no dissenters or any convincing proposals of what to do.

A rioter's stone-throw away the "we won't pay" brigade was waving banners and drawing caricatures of the big "thieves", the politicians and their crony contractors who had swallowed Greece's structural funds from the EU and now wanted "the people" to repay their debts.

Some memories are remarkably short. Anyone who lived in Greece 10 years ago would remember the first deluge of cheap credit in a country where mortgages were a rarity and credit cards hard to obtain from banks sceptical of your creditworthiness – where you could bet on foreign sporting results but not Greek ones as no one trusted that matches weren't being fixed. Suddenly, this country was transformed as high street shops dispensed with telling you how much things cost in favour of listing prices in "interest-free instalments" and each spring the airwaves would ring with adverts for "diakopodaneia" or "holiday loans". Just as its entry into the euro meant that the Greek state could borrow at German interest rates, its citizens were enjoying a consumer feast that they were told – and were telling themselves – was their right as Europeans.

The state was spending outlandishly on the Olympics as its citizens bought up everything from luxury cars to holidays. The conspicuous consumption which had always married well with the Greek flair for excess touched new heights. The "new Greek" could read Status magazine, have a €7.50 iced coffee and drink until dawn in places with names like Envy and Privilege.

But that could only last as long as economic growth was strong and everyone inside and outside the country pretended that it was supported by a standard European economy. Most people knew differently and would admit as much to each other if not to outsiders.

Sitting with a friend in an average Athenian taverna, I was talked through the charade of petty corruption in which almost everyone was complicit. He had cut his teeth professionally working for a consultancy that bid for state contracts in the IT sector. His job had been to write funding proposals according to a formula decided by the closed shop of bidders. The projects were wasteful at best and often totally useless. But in a country in which publicly owned trains were costing the state so much that it would have been cheaper to buy first-class air tickets for every passenger, it was accepted as the way things were done. Up to one-quarter of the economy paid no tax, civil servants, who retired early and often did little, were unsackable and tax breaks for doctors meant there were twice as many of them as in any other equivalent country.

No amount of scandal ever seriously threatened to disrupt this clientelist state.

Aristos Doxiadis, an investor, blogger and private-equity professional, borrows from game theory to explain Greeks' approach to each other. He points out that in most developed economies people are mainly "co-operators" who follow rules.

But Greeks are "opportunists" for whom their own short-term interests are paramount. In a "co-operators" economy the opportunists can follow the rules because they see that's the best way to get ahead; back at home, surrounded by other opportunists, the assumption among them is that the rules must be disregarded by everybody.

He also points out that Greece's economy is primarily based on small businesses, many of which are family run, and property ownership is unusually widely dispersed. In other words, corruption in Greece is democratic – or as one unemployed mathematician told me in Syntagma, "we are all small-time crooks".

In Syntagma I found Gazi Kapplani, an Albanian writer who lives and works in Greece, wandering among the crowds. Tens of thousands of people from all walks of life regularly descend on the square to join ongoing demonstrations in a phenomenon that many are still trying to understand. Right-wing nationalists occupy the upper square and leftists, anarchists and progressives the lower part, but the crowd is mostly newcomers, the "same mixture you would find on a metro train" as one of my friends put it.

With their quiet fear and confusion they remind me of the crowds that poured into the streets in the wake of the deadly Athens earthquake in 1999, shocked into meeting each other for the first time by a suddenly dangerous world.

Kapplani describes them as "orphans" and says the primary emotion he senses, aside from anger, is an "overwhelming nostalgia for a time that has just past" and will not be returning. "Everyone is shouting for change but in essence no one wants anything to change."

The biggest absence felt is of a new narrative. Coming out of the junta Greece set course for joining the European Community and after that for meeting the convergence criteria – at least superficially – for the euro. Beyond the euro was the Olympics, which pulled the people in its wake.

Now what? Nobody in a leadership role has put forth a convincing narrative for Greece's future and in its absence there is only a sense of loss, betrayal and the desire of outsiders to punish Greek profligacy.

Crisis, which is a Greek word, has two meanings – the one that we are used to in English, but it can also be used to express a judgment. In the streets below Athinas Avenue in Athens, which seven years ago were the heart of the city's extraordinarily late-night culture, the bleak view of austerity Greece comes into focus. This is one of the transit points for newly arrived immigrants of which Greece, as an EU border state, receives many hundreds of thousands.

Locals here claim violent crime has risen and shops and businesses have closed and left. Guru bar on Theatrou Square, which was once a magnet for cultured Athenians, has closed its doors and its metal façade has rusted. The former owner is still embroiled in a court case over police failures. Everyday, police foot patrols sweep this area rounding up as many as 500 illegal immigrants who are bussed to the aliens centre.

A young officer, standing guard by the latest batch of Afghans, Pakistanis and others who were gathered up, says that violent crime has been exaggerated but petty crime is rampant. He advises leaving before it gets late; all shops in this area, which once drew crowds until dawn, are now closed at 9pm.

I find that a wine and spirits store on Evripidou Street, where I used to shop, is closing. The owner is taking early retirement and leaving Athens, he says, after repeated burglaries. Like many average Greeks he's poisonously hostile to the dark-skinned immigrants but delighted to speak with a light-skinned foreigner. He rummages in the back of the shop to find a bottle to give me as a keepsake and warns me to take care outside.

These streets – with their obvious signs of decline, unemployment, uncontrolled immigration and disaffected policing – scare outsiders just as much as they do the "indignants" milling in their thousands around Syntagma. The intense interest in Greece is partly brought about by foreign banks' exposure to bad debts and because it offers a glimpse of the possible future in many other Western nations. Despite its specificities, Greece's decline and the indignation this has caused is being mirrored on the streets of Portugal, Spain and elsewhere – which makes it even more important to be realistic.

Crime, as the young police officer explained, is not as bad as people think. I was told of an accountant who had to tell a client convinced he'd lost one-third of his earnings that the man had declared only 10 per cent less than the year before. The client answered that he was sure that was only short term and that next year they would plunge by one-third.

The pessimism is catching.

Beyond Athens in the rest of country the malaise is not felt so deeply or consistently. Further away from the epicentre of the clientelist state there are signs – borne out of increased exports – that a different kind of economy is possible.

For now, though, Greeks who want a way out of the crisis struggle to elucidate a new narrative. The problem, according to the linguistics expert Hypatia Vourloumis, who has spent hours listening to the discourse at the popular assemblies, is that the language they use is "fossilised" – it is constructed from obsolete slogans and ideas.

In early July a big audience is expected for a debate in Athens on whether young Greeks should leave Greece to seek opportunities abroad. With panels composed of internationally feted venture capitalists, academics, writers and a young start-up executive it is a welcome reminder that despite the gloom there is an argument to be made for recovery.