Greece: A new age of austerity and anger dawns

Economic crisis sparks violent Greek rallies.

May Day: the traditional time of gatherings to celebrate the end of the dark days and the coming of warmth and hope. Not in Greece 2010, it's not. Here, yesterday, 1 May marked instead the sudden eclipse of the good years and the imposition of a new age of austerity, and tens of thousands rallied on the streets of Athens in anger, shock and anticipation of the pain to come.

Make no mistake, this is going to hurt almost everyone here. What is coming – as part of a deal to provide eurozone loans aimed at rescuing Greece from near bankruptcy – are not a few, distant cuts in public spending, or efficiency savings that will erase a consultant here and a fringe project there. The measures – to be finalised at a Greek cabinet meeting this morning – will hit every citizen hard in the money belt. VAT is already 21 per cent and is likely to go to 23 or even 25 per cent.

Other taxes are liable to rise, too. Public service pay will be frozen, or cut, and some of the exotic bonuses of civil servants – they can earn up to two months' extra salary if, for instance, they use a computer or arrive for work on time – will go. And, in one of the biggest jolts of all, there will be a swift change in pensions policy. The average age of retirement in Greece is 53, and this will now swiftly move to 65 or even 67.

All this, and more, is necessary to try to reduce a deficit which stood at 13.9 per cent of GDP last year. This is four times the limit allowed in the eurozone, and requires international loans worth €45bn (£39bn) this year alone. A deal with EU and IMF officials for loans in exchange for more than €20bn of deficit-cutting measures is expected to be announced at an emergency meeting of eurozone finance ministers in Brussels today.

A few days ago, there seemed to be questions over Germany's sizeable contribution to the bailout, but these have now been resolved. It emerged yesterday that Germany, which had shown great reluctance to help fund a Greek bailout in the face of public opposition, was put under massive pressure to change its mind at a G7 summit in Washington last weekend. Timothy Geithner, the US Treasury Secretary, was said to have told his German opposite number, Finance State Secretary Jörg Asmussen: "The Greek problem needs to be dealt with before the crisis spreads to other countries. As the leading economic power, this is Germany's job." The "problems" were resolved.

And none too soon. Greece says it must pay €8.5bn in bonds by 19 May. Prime Minister George Papandreou has said: "The economic measures we must take ... are necessary for our country's protection. The top priority is the survival of the nation. This is the red line." This is not what millions of Greeks want to hear, according to a poll in Proto Thema newspaper. Just over 51 per cent said they would take to the streets if these new measures were agreed, and they will get their first post-deal chance on Tuesday when the public sector union has called for a four-hour work stoppage, with a nationwide strike the next day.

Nikos Diamantopoulos, who was participating in a rally organised by pro-communist unions, said: "These measures are death. How people are going to live tomorrow, how they're going to survive, I do not understand."

Union members marched towards the Athens offices of the EU and continued to the US embassy. Minor clashes broke out between rock-throwing anarchists and police, who responded with pepper spray. Nine protestors were arrested. In the city of Thessaloniki, where more than 5,000 people demonstrated, anarchists smashed a few shopfronts and ATMs.

The rapid change in circumstances in Greece is borderline traumatic. Greece's once booming economy was based on consumption. Joining the eurozone in 2001 brought interest rates down, and people rushed to get cheap mortgages and loans. But huge budget deficits and debts have plunged Greece into a deep crisis, shaking international markets and the euro. It ran up debts equal to 115 per cent of gross domestic product. In effect, it has been shut out of bond markets to refinance its debt pile because investors fear default and are demanding high rates of interest the government says it cannot pay. Analysts now think the country's €240bn economy is likely to contract in 2010 by more than last year's 2 per cent, as the belt-tightening and rising unemployment take their toll. The IMF said it expects Greece will take 10 years to overcome its financial crisis.

It is not the only indebted eurozone economy contracting. On Friday, just when Spaniards thought things could barely get any worse, afternoon news headlines confirmed the country has now reached 20 per cent unemployment, its worst level since 1997, and twice the rate of just two years ago. Even a few of the normally chirpy lunchtime TV chat shows made the announcement that Spain's unemployed now total 4.6 million a major theme. Spain remains the only Western European economy still officially in recession, and the jobless total among those 25 or younger has reached its own symbolic landmark of 40 per cent. Talk of an entire "lost generation" of workers is widespread.

The continuing collapse of Spain's building industry, one of the motors of its economic boom in the noughties, is one of the big culprits. Eight out of 10 of the 700,000 jobs lost in the last year alone were occupied by males, traditionally more likely to work in construction. The knock-on effects of the disintegration of one of Spain's flagship industries on other areas has been huge. At 10am on the dot, bars and cafés across Spain used to be flooded by construction workers eating their mid-morning sandwiches. Now the sight of grimy, overalled males propping up the bar each morning has become a rare one – and with 89,700 more unemployed in the services sector in the past three months alone, there will be correspondingly fewer places to serve them, too.

Not even agriculture, traditionally one of Spain's strongest industries, has been unaffected by the country's eleventh hike in 12 months in unemployment figures. Even as spring harvests begin, unemployment in the sector rose remorselessly by another 5,800. Perhaps coincidentally, the government also timed the publication of the unemployment figures with news of a series of spending cuts, axing 32 senior government positions and 29 state-run companies to save €16m. But despite the austerity moves, many Spaniards will have to tighten their belts this summer when VAT goes up two points from 16 to 18 per cent.

Spain's general public had an opportunity to express their dissatisfaction with the economy at Saturday's traditional May Day demonstrations. People took to the streets in 80 towns and cities, some bearing placards demanding "decent jobs and guaranteed pensions". They are not the only Europeans finding out that such guarantees – for a time, at least – have gone.