Sick man of Europe seeks remedy from wary neighbours

Offices deserted. An economy on the brink. A nation in uproar. As Greece is stricken by walkouts, John Lichfield finds cautious hope of salvation on the streets of Athens

As we speed into Athens by taxi the radio voice switches abruptly to English. The Greek DJ is a wannabe Michael Moore or Russell Brand.

He repeatedly telephones a switchboard in London (where it is after 10pm) to put challenging questions on the Greek debt crisis. "Hello, is that The Financial Times? I want to speak to someone who will tell me why the world hates Greece." Switchboard operator: "Just a moment, please, I will try to connect you." Finally, after several attempts, the DJ gives up and announces, in excellent English: "I do not give a blind f... for The FT."

The FT has become, to some Greeks, a shorthand for the world's markets and media. Greece has been in an appalling mess for years, people say. So why are all of you getting so excited about poor little Greece all of a sudden? Strikes by Greek public sector workers are not uncommon. And yet a 24-hour stoppage yesterday, which closed airports and schools and disrupted hospitals, railways and government offices, was scrutinised all over the world. How strong were the unions? Would the government back down, as they traditionally do in Greece?

The country has become, in the words of Spyros Kapralos, the chairman of the Athens Stock Exchange, the "new Lehman Brothers": a domino which, if it falls, could knock down many other dominoes, and not just the other, heavily indebted southern European members of the euro. "When the decision was made to let Lehman Brothers go in September 2008, it seemed sensible but the consequences were enormous," Mr Kapralos said. "I think that if the US could take that decision again, it would not do the same. This is true now also for Greece. Let Greece go and Portugal or Spain would be next, and so on around the world."

The new Greek government announced plans this week to cut the public sector, reduce pension rights and reform the country's chaotic tax system in order to reduce its massive budget deficit and erode its horrific accumulated debt of at least €300bn. The money markets have been betting colossal amounts for weeks that Athens will fail and default on its loans, or be forced out of the euro – or both. The public sector unions, which have generally succeeded in blocking even minor reforms in the past, say that their members must not suffer for "foreign speculators" or – more to the point – pay for the many wealthy Greeks who contribute no direct taxes to the state.

Yesterday's strike, which will be the first of several, was a scoreless draw or, perhaps, a points victory for the government. There were skirmishes and scuffles. But the turnout by demonstrators was hardly overwhelming. There was no sign of the government – or the unions – backing down. Greater tests are still to come.

The Greek Prime Minister, George Papandreou, visiting Paris to assure support before an EU summit today, said he would "take any necessary measures" to reduce the deficit. "The stability program will be implemented in every measure," he promised. Under the rules of the European single currency, a "bailout" by the EU is not permitted. EU leaders meeting in Brussels today are expected to pledge that they will find a way around the rules if necessary. In other words, if the money markets continue to bet on a Greek default, they will lose.

Finance ministers from Euroland countries met in a video conference call yesterday. EU leaders will issue a statement today which may – or may not – be strong enough to relieve the market pressure on Greece and make an actual "bailout" unnecessary. But EU leaders will not not want to relieve the pressure on Greece entirely. A game of three-, or four-way, poker is in progress between the EU, the markets, the Greek government and the Greek people.

Conversations in Athens in the last few days – with politicians, business figures, union leaders, pollsters and people in cafés and on the street – suggest that Greece may now be ready to accept the pain of long overdue reform if the pain is shared evenly. The problem is that nothing in Greece is even; many things are fragmented. The sparkling new Athens metro, largely funded by the EU, co-exists with crumbling third-world pavements. Luxury shops are opening up in the wealthy district of Kolonaki. Two or three blocks away, in the poorer district of Exarchia – epicentre of the 2008 riots – almost half the local shops are boarded up.

Almost 30 years after joining the EU, Greece remains partly a country of the Levant and the Balkans and not a fully developed European economy or political system. The self-employed, from doctors to restaurant owners, represent two-thirds of the workforce. By entering risibly low but unchallenged tax returns – an average of €4,000 for restaurant owners, €10,000 for lawyers – they pay almost no income tax. The number of state employees has more than doubled to over one million since Greece joined the EU in 1981. Many Greek civil servants retire in their forties or fifties on high pensions.

All attempts at enterprise and job creation must pass between the Scylla and Charybdis of cronyism and petty, or less petty, corruption. In Greece, people say, you can't easily bribe civil servants to do the wrong thing but you often have to bribe them to do the right thing.

Eliana, a middle-ranking civil servant, said: "Yes, there must be change in Greece. People know that there must be change. We cannot keep on living on debt. But the change must be fair and it must apply to all. Why should it always be the same ones who pay? They say cut the public sector, squeeze civil servants, but it is always us that they squeeze. What about the lawyers and doctors and self-employed who pay no income tax? What about the very wealthy ship owners and others who put all their money abroad?"

Opinion polls say nearly two-thirds of all Greeks, and half of the civil servants, back their Prime Minister's plan not just to cut the deficit but to turn Greece into a properly functioning, modern European state. Mr Papandreou has been obliged by the crisis to squash the reforms delayed for years into a few months – a veritable cleansing of the Augean Stables. He is an honourable, able man but it remains to be seen whether he is a reincarnation of Hercules.

The former finance minister, George Alogoskoufis, lost his job in the previous centre-right government when the global recession began in 2008. He is blamed by some for allowing the debt to pile up. He says his attempts to push reforms – such as a radical suggestion that lawyers and doctors should pay income tax – fell foul of the usual special-interest pleading within his own party. Mr Alogoskoufis believes that the new government inadvertently lit the touch-paper of the present crisis. The new finance minister announced that the budget deficit last year would be 12.7 per cent of GDP – double the estimate of the previous government. Athens has a debilitating reputation for fiddling numbers to minimise its debt and deficits. (They are known in Brussels as "Mythical Greek figures".)

On this occasion, Mr Alogoskoufis said, the new government deliberately overestimated the real deficit so that it could claim the political credit for reducing it rapidly. The money markets joyfully took the government at its word and began to bet on a Greek default. The yield or interest rate on Greek government bonds – in effect, the price Greece has to pay to roll over its old, accumulated debt – shot through the roof. That seemed to make a default more likely, so the speculation grew.

"But there is a positive side to what has happened," Mr Alogoskoufis told The Independent. "It needed this sense of serious crisis to change mentalities in Greece. The question is whether we can sustain the mood and whether this government will have the courage to defeat the opposition within its own party and not start to backslide one or two years down the road. This, I am sure, is why the EU has been so reluctant to state publicly that it would intervene. If it was made clear that Greece could expect a bailout, everybody would have relaxed and it would have been business as usual."

To succeed, Mr Papandreou, the American-educated, third-generation member of one of the great Greek political clans, must prove that his reforms will be fair to all.

We met Sotiris Poulikogiannis, radical, left-wing leader of an independent ship repairers' union, outside the Piraeus hall of justice. He is facing scores of lawsuits from employers after winning a shorter working week for his members. The economic crisis has already reduced the ship-repairing workforce in Greece from 7,000 jobs to 1,000, he said. "To me this financial crisis is a charade. It is just another way of pushing through anti-people measures, like higher taxes on drink or cigarettes or mobile phones... Billions of euros were given by the government to the Greek banks last year. Where has all that money gone? It has been taken by the 'golden boys' for speculation and now they tell us the state deficit is out of control."

George Karabelias, a left-wing commentator and author, also says that the "debt crisis" should not be allowed to conceal Greece's true problems. Greece, he says, has become a "parasite economy". Its own industry has disappeared, unable to withstand competition within the EU. The country is dependent on shipping, tourism and debt – all three of which were undermined by the global recession. "It is hypocritical of the Germans especially to complain about about Greek debt," he said. "What is the debt spent on? German cars. Greece is one of the biggest importers of Mercedes in the world."

It is one thing to demand a cut in the one million public sector jobs in Greece, but how can the jobs be replaced? Mr Kapralos said a lower-tax, less bureaucratic Greece would be "perfectly placed for investment. We are the gateway to the Middle East for the EU and to the EU for the Middle East. I have no doubt that, if we stopped making it so difficult to invest and thrive here, Greece could do very well indeed."

Generations of Greeks have shrugged their shoulders at the problems or found their own way through the morass. (The black economy is thought to be 30 per cent of the "real" economy.) But these attitudes may be changing. Paschalis Aganidis, 28, spokesman for "Generation €700" – a centrist pressure group for young Greeks – says that people of his age are beginning to ask why Greece should not be more like other developed nations. "Our society is characterised by corruption, impunity, cronyism and bureaucracy," he said. "The greatest victims of these traditions are young people, who will pay the accumulated debt for decades to come but can't find secure, well-paid jobs. This crisis could be a good thing. Greeks see that things cannot now go on as before."

Ancient Greek metaphors are irresistible when discussing the Greek "crisis". But then "crisis" is a Greek word. So are "politics", "democracy, "Europe", "economics" – and "paranoia". Will the Greek crisis turn out be a temporary drama – or will it end in tragedy? In classical Greek drama, according to Aristotle, there is a moment of "catharsis" – a moment of "cleansing" or "renewal", through exposure to fear. Optimism is not a Greek word but Greek optimists believe that Greece may be going through its moment of catharsis.

Could this crisis become a tragedy?

Q. Why are all eyes focused on Greece?

A. It is partly Greece's fault. Partly, the markets have smelled a way to make money from a weakness in the regulations surrounding the euro. Greece's budget deficit last year was officially 12.7 per cent of GDP, more than twice previous forecasts. Since that was announced in December, the bond markets have been predicting – and also making more likely – a possible Greek default. The "yield", or interest rates, on Greece's accumulated sovereign debt, around €300bn, has been climbing. This worsens an already critical situation. As a member of the euro, Greece cannot devalue or change interest rates. Under the euro rules, the EU cannot bail Greece out.

Q. What happened yesterday?

A. Public sector workers went on a 24 hour strike in protest at a crash programme of reforms – the first strike of several. The Prime Minister, George Papandreou, unusually for a Greek leader, is standing firm.

Q. Is the euro threatened?

A. Probably not. The fear is that if Greece defaults or has to leave the euro, the markets will smell Spanish or Portuguese or Italian blood. The crisis could spread. EU leaders will today make a statement pledging to bend the rules if necessary. They will try to warn off speculation by saying that they will, if required, find some way of helping Greece.

Greece crisis in numbers

700,000

Civil servants in the Greek central government, with another 300,000 nationwide. The country has a total population of 11.2 million

12.7%

Estimate of budget deficit last year, four times what Eurozone rules allow

£25 bn

Previous government's estimated payments as part of banking system bailout in 2008

£259 bn

The estimated total national debt, or about 113 per cent of GDP – the highest in Europe except Italy