First phase: The financial markets collapse under the impact of a declining US housing market, massive speculation and financial sector debt. A number of the world’s largest financial institutions are brought to insolvency. All the so-called certainties of classical or “neoliberal” economics are shattered.

Second phase: Keynesianism seems to return. Governments step in with massive bank bailouts and stimulus measures. They spend hand over fist to contain the financial crisis. In Europe alone, states pledge over €4 trillion in guarantees, loans, rescues and recapitalisations to failing financial institutions. The system stabilises, but the patching up of gaping holes in the global economy creates further problems.

Third phase: States are struggling to manage the tripling of government debt in the course of saving the financial sector. Thus far there has been no unified strategy or coherent response from the ruling class. Yet a series of questions have been raised: How will economies cope when massive government support is withdrawn? How will governments manage to repay their enormous debts without inflicting more economic damage? Who will bear the brunt of the repayment plans?

We are about to get some tentative answers. A series of test cases are being undertaken in the struggling, smaller European Union (EU) economies. The results of these experiments are likely to have far-reaching ramifications.

Ireland set the stage. The government committed more than €11 billion in bank bailouts, then organised for funding from the European Central Bank (ECB) to help the financial sector clear out a further €54 billion in toxic assets. GDP dropped by 7.5 per cent in 2009 and the government deficit rose to 11.7 per cent of GDP.

The government made it clear that workers would bear the brunt of the bankers’ profligate ways. The December 2009 budget announced cuts of over €4 billion, which included a dramatic lowering of public sector pay by 5-15 per cent, cutting the child benefit by 9.6 per cent and unemployment benefits by over 4 per cent.

It was the biggest attack, Tony Barber noted in the Financial Times, “since the declaration of independence in 1919”.

Now Greece, Portugal and Spain are in the spotlight. Like other countries, they have amassed significant budget deficits (one-and-a-half to two times the European average). Speculators – their wallets fat from the huge injection of cheap funds into the system – have gambled on these governments defaulting on their debt. The cost of borrowing has increased rapidly, threatening the governments with insolvency.

The cost of insuring Spain’s debt has escalated to about twice as much as Britain’s and four times more than Germany’s. Greece, whose costs are twice those of Spain’s, is facing the prospect of bankruptcy.

Unlike the banks, which were given blank cheques by governments and the ECB, these governments are being told to slash and burn their budgets if they want to get any assistance. The markets, saved by governments, have now turned against the governments themselves.

The Australian Financial Review noted one analyst’s evaluation that the populations of Greece and Portugal need to cut consumption by 10 per cent. That’s the sort of medicine that the markets would like to see prescribed. Such a script would see hundreds of thousands pushed into poverty and the gutting of social services. It is not something that bankers themselves have ever taken a dose of.

Yet all three governments, led by social-democratic parties, have responded not by hitting back at the market (something Iceland’s government at least attempted by calling a referendum for March over whether or not to pay a section of its debt), but by following Ireland’s lead and lashing out at the working classes in their own countries.

Only four months ago, George Papandreou, leader of the Panhellenic Socialist Movement (PASOK), was the emphatic victor in the Greek general elections. He promised to “put the citizen at the heart” of his new government’s agenda, keep pay rises above inflation and make the rich pay for the crisis.

The blissful beating of Papandreou’s heart, however, will be quickly drowned out by the swinging sound of his blunt axe. Fronting the World Economic Forum, he pledged to Europe’s ruling classes that he would “draw blood” to turn the situation around in a way they found satisfactory.

A new “stability and growth program” will see a civil service hiring freeze in 2010 and a rule from 2011 onwards that allows only one new hire for every five retirements; a 10 per cent cut in allowances for the public sector; a proposal to lift the retirement age by two years, from 65 to 67; and a 10-15 per cent increase in fuel taxes.

Zapatero in Spain and Socrates in Portugal are following suit, announcing austerity measures (although the Portuguese conservatives have aligned with the left to defeat the measures in parliament at this stage). Both countries have vowed to lower deficits by cutting government jobs, freezing civil servants’ pay and curbing spending.

These countries have been declared a problem by pretty much every section of the establishment and their press aides. Yet they are a symptom of the broader problem afflicting the world. The developed economies experienced general slowdowns in growth in the decades leading in to the financial crisis. The rate of return on investment in the real economy struggled to return to the highs of the 1960s. Developing economies like China began to make inroads into Western economic supremacy.

The massive drops in industrial output, and spiralling debts as a result of the financial crisis, have brought the decline in dynamism of Western economies into sharper focus. There are a whole series of economic questions which are raised by the current predicaments of the smaller European countries.

More importantly, however, is the question of the working class response to the attacks. Will there be acquiescence or resistance?

There have been attempts to roll back the gains of the European workers’ movement for decades now. The European ruling class wants a “competitive Europe”, one that can match the working conditions of the United States, where a social safety net is unimaginable to many. Government after government has attempted to cut living standards and thwart union power. Yet they have faced constant resistance to their goals of rolling back workers’ rights.

The current situation has led to the teaming up of the bankers, speculators and governments in a bid to unleash havoc on the Greek working class. The key player in the EU, Germany, has been a notable voice baying for blood. In ruling class eyes, there is good reason for this.

Greece makes up only 2.6 per cent of Euro-zone GDP, Portugal 2 per cent and Spain 12 per cent. They do not have a size or development comparable to Germany, France or Britain. If the united ruling classes of Europe can get away with massive attacks in these smaller states, then they will be better placed to finally undo the vestiges of social-democratic reform in the central European economies.

In this regard, Greece is a genuine test case, the results of which will be far-reaching. If the austerity measures can be pushed through, the ruling class will be able to use the fact of Greek workers’ acquiescence to beat against the workers’ movement in their respective countries. The only alternatives, they will argue, are competitiveness through austerity or joblessness.

They already have some leverage through such arguments. In Ireland, there was an initial push back against the government, with the biggest public sector strike in 30 years. However, with the public sector union today only talking about the “possibility of a full-scale strike”, the government seems to have got what it wants – at least for the time being. That has set a small but important precedent.

Yet Greece has now clearly overshadowed Ireland. The market's dramatic focus on its status and the public way in which the ruling class has lined up to demand action ensured this would be a country in the spotlight. The workers’ movement there has also been more militant and is recognised as such. Memories of the 2008 mass demonstrations against the previous government’s right-wing agenda are still fresh in everyone’s mind. There is a recent history of general strikes and street confrontations emanating from government attempts to push down wages.

Already last December there was a wave of strikes by communist-led unions when the government outlined plans for cuts. In the wake of the latest announcements, Greek customs and tax officials launched a 48-hour strike on February 4 that reportedly shut down ports and border crossing points. The General Confederation of Greek Workers (GSEE), which represents private sector employees, announced a one-day strike for February 24 in solidarity with public sector workers who are to strike on February 10.

Yiannis Panagopoulos, the president of the GSEE and a member of PASOK, expressed the bitterness and outrage that many are feeling over financial profits being put ahead of human lives: “What do we have to do – kill off the old and the poor to get back to acceptable spreads?”

It’s impossible to say how things will pan out, however. A couple of set-piece strikes will not alter the situation. Too much is at stake and this phase of the crisis – where ruling classes grapple with massive deficits and sub-par growth – will last years, not months. If the workers in Greece fail to resist the current attacks, then ruling classes across Europe will be better placed to strike out again. Greece will be a significant domino to fall and will embolden them to continue their attacks.

However, if they meet significant resistance from the working class, then their plans could be thrown into turmoil and the markets sent into a panic quite quickly. Most importantly, Greek workers can light a path for workers across Europe. If they can successfully defend themselves, then others can be inspired to do likewise. This has to happen, and it will also have to happen in countries like Australia when the cuts begin to take shape here too in the next few years.

For these reasons, what happens in Greece will be an important outcome in the latest phase of the crisis.