Patrick Cockburn: Greece and Ireland's dreams of equality go as quickly as the money

An American took his phlegmatic English friend to see the Niagara Falls. "Isn't that amazing?" said the enthusiastic American. "Look at that vast mass of water dashing over that enormous cliff!"

"But what," replied the unimpressed Englishman, after viewing the sight for some moments, "is to stop it?"

I owe the story to my father, Claud Cockburn, who used to tell it to convey the mood in New York on 24 October 1929, the first day of the Great Crash later known as Black Thursday. He had arrived in the city from Europe a few weeks earlier as junior correspondent for The Times of London just in time to have a ringside seat as the American financial system crumbled. He described the atmosphere on that day as not just edgy or demoralised, but as being like "the morning of a battle which people are beginning for the first time to realise may be lost".

Perception of the crisis in Europe over the past month has been less concentrated in time and place compared with Black Thursday in New York, but in other ways the reaction is similar. What seemed unthinkable a month ago now appears unstoppable. Talk by European leaders of the break-up of the eurozone or the ejection of some countries is no longer taboo.

Illusions of a new European order are evaporating. Once countries such as Greece and Ireland, with histories of poverty, immigration and foreign domination, believed they had finally caught up with the British, French and Germans and would enjoy the same standard of living.

It isn't going to happen, and collapse of these hopes makes the shock of the financial crisis all the greater in places where people believed that it would. The worst affected economies may eventually stabilise, but they will not wholly recover. "Greece would like to rebound to its old pre-crisis level," Tassos Teloglou, one of Greece's leading investigative journalists, told me. "But this is impossible because this was based on us having the same triple AAA credit rating as Germany and pretending we had a similar level of debt. You can't go back to that because they [foreign countries and international banks] don't trust us any more."

I spent the past month in Greece and Ireland. In most of Europe, the financial crisis is only slowly beginning to deaden economic life, but in these two countries the calamity has already arrived. I grew up near a small town called Youghal on the Blackwater River in County Cork. In the 1960s, the town had a large carpet factory and several textiles factories, and workers had to be bussed in from far away. Today, after many ups and downs, Youghal has no factories and the largest employer is the local mental asylum. The careers officer at a local school told me: "There are no jobs for students anywhere. The best placed are those who come from small family farms they can go back to."

On the island of Naxos in the Aegean, at the other end of Europe, the prospects are equally gloomy. Katrina Sideri, in charge of vocational training in the mountain village of Chalki, says that highly qualified people speaking two foreign languages are retraining to take jobs in tourism, the only industry that still provides employment. "People are scared," says Vasilis Krasas, the head of an association of farmers herding sheep and goats in a nearby village. "They are shut up in their homes and don't come out. They are even having to send food parcels to their relatives in Athens."

The lamentations of the Piigs (Portugal, Italy, Ireland, Greece and Spain) don't elicit much sympathy in the rest of the European Union. The Greeks, in particular, are seen as tax-evading subsidy-guzzling freeloaders who are getting what they deserve. For the moment, they, along with others in the worst indebted countries, will take their medicine, however toxic its side-effects, in the hope of seeing light at the end of the tunnel. But even in Ireland, where the government has strained every nerve to meet the terms of the bailout, impatience is growing as people ask if being the EU's "good little Piig" is doing them much good.

In Greece, the political approach of the EU never made much sense except as a form of exemplary punishment of Greeks to dissuade the Italians and Spanish from even partially defaulting on their debts. Foreign-imposed austerity measures so tough that they discredited the government implementing them were bound to erode support for long-term structural reforms. When Prime Minister George Papandreou sought to re-legitimise his government by proposing a referendum, he was forced to recant and then resign.

In Ireland last week, there was a similar if little-noticed demonstration of the degree to which the country's elected government no longer exercises real power. A billion dollars was paid by the Irish state to the unsecured bondholders of the Anglo Irish Bank, the bank that contributed most to ruining the country. It is not that the Irish government wanted to do this but a gun was pressed menacingly to its head. "The threat came from the European Central Bank," writes the commentator Fintan O'Toole in The Irish Times, "and it was as crude as it was brutal: give the spivs your taxpayers' money or we'll bring down your banking system."

Such threats cannot be endlessly repeated unless those acceding to them see positive benefits down the road. Without such rewards a government obeying these diktats will rapidly discredit itself. Installation of coalitions led by supposedly squeaky-clean financial technocrats in Greece and Italy get a good press but have little legitimacy. Existing political parties may want to evade responsibility for making concessions to the European Central Bank (ECB), International Monetary Fund (IMF) or EU leaders, but they have no intention of retiring permanently to the sidelines.

The political turmoil in the Piigs can only grow. Governments will be forced to pay for their sins of failure to avoid catastrophe. Policies based on austerity alone will not fly. The erosion of national sovereignty will become ever more patent. The political incapacity of the EU to decide what to do next will also become more patent.

The political future of a country such as Greece becomes more incalculable because the financial hurricane has altered the weight of different players in its politics. For instance, the ship owners have historically been politically influential, exercising their power through their ownership of banks and the media, but banks are now tottering and some journalists are not being paid.

There are those Greeks who feel that their existing state system is so corrupt and dysfunctional that reform can come only from outside. The weakness of this argument is that the austerity regime being imposed by the Troika (EU, ECB and IMF) has provoked an economic collapse that discredits reform.

On Black Thursday in 1929, my father said he realised how bad the situation was only when another Times correspondent in New York murmured to him in a low voice: "Remember, when we're writing this story, the word 'panic' is not to be used." In the present crisis much has been made of the panic of the bondholders, but the real explosion will come when the panic building in the streets of Athens spreads elsewhere.