Last December, when the leaders of the European Union gathered for their year-end meeting, the mood was tense. As always, proceedings began with a simple working dinner around a big oval table in one of the ugly modern structures in downtown Brussels where Europes affairs are administered. These meetings are supposed to be sociable, and it would be bad form for one European leader to make an open, personal attack on another. But the issue on everybodys mind was the folly of a single EU member, Greece. The countrys new Socialist government had recently announced that the 2009 Greek budget deficit would not be 6 percent, as estimated by the previous conservative government, but 12.7 percent. Thats four times the acceptable limit for budget deficits under the rules of the common European currency, or euro zone, which Greece joined in 2002 after a hard struggle to convince its partners of its eligibility. The announcement rocked world financial markets, which feared Greece might default on its debts. That in turn led to talk in the markets that the whole euro zone might be at risk. For a union that counts the creation of a currency as its greatest feat, this was hard to forgive. But the bigwigs gathered in Brussels seemed uncertain about how to deliver this message to the new Greek prime minister, George Papandreou.

In the end, it was Papandreou who relieved the tension. Far from waiting for the flak, Papandreou told his fellow European leaders that, in effect, they didnt know the half of it. Yes, Greeces budget deficit had ballooned out of control. But in truth, the prime minister said, things were worse. It was not simply a matter of getting the numbers back in order; the fact was that his country suffered from systemic corruption. Whether the sums were large or small, every cent that flowed through the Greek state was as likely to “reinforce bureaucracy” as it was to serve the public.

His listeners were impressed by this disarming frankness. It did nothing immediate to solve Greeces financial problems, but it did send a message that Papandreou aims to do more than just get Greece and the EU out of this immediate crisis, daunting as that task will be. Rather, according to some of his closest aides, he wants to use the crisis as leverage to reform Greeces whole political economy.

So his efforts are worth watching, and not only because that may help determine the future of the euro zone, one of the great political and economic experiments of modern times. They are also a test of whether it is possible for a country mired in debilitating corruption (and there are many that are more corrupt and worrisome to the United Statesthink Mexico or, at the far end of the scale, Afghanistan) to change its spots and its stars. Or, put another way: are traits like corruption baked into a countrys national character, or are they mutable habits that can, via democratic means, change?

I n seeking to answer that question positively, Papandreou is not just trying to break the habits of an entire society. He is also, in some ways, taking on the legacy of his family. The grandson and namesake of a liberal prime minister, he is also the son of Andreas Papandreou, the fiery founder of Greeces socialist PASOK party. During three terms as prime minister in the 1980s and early 90s, Andreas took a historically swollen and patronage-ridden public sector and made it far more so. Subsequent governments, liberal and conservative, have made scant headway in paring the state back, and corruption in the political system and bureaucracy has, if anything, gotten worse.

Yet the current prime minister is a very different man than his father. While Andreas was a wily demagogue who played on nationalist grievances, George in many ways is a politician of the cool, rational north, with a keen eye for the failings of the exuberant, impulsive south. Born in 1952 in Minnesota (where Andreas had a university job), his childhood memories include fleeing from Greece in 1967 when military officers took power and arrested his father. The family found refuge initially in Sweden (whose language George still speaks) and later in Toronto. He studied at Amherst and the London School of Economicsand, much later, at Stockholm University and Harvard. His interests mark him out as a liberal in the American or Scandinavian sense, not an authoritarian leftist. They include environmentalism and “green growth”; the welfare of immigrants; and, above all, e-democracythe use of new technology to empower ordinary citizens and create transparency in government. Whereas Andreas often denounced most European socialists, and some European communists, as too moderate, George is closer to the political center. As head of the Socialist International (a global group of center-left parties that his father refused to join), he has encouraged his comrades to move away from Karl Marx and embrace progressive thought of a more nuanced kind. His heroes include the Nobel Laureate economist Amartya Sen, who has written extensively on the connection between economic development, personal freedom, and fair and just political institutions.

All this would make Papandreou a fine candidate for a chair at a North American or Scandinavian university. The question is whether his moderate temperament and high-minded ideas can work in the real worlds of Greek and EU politics, each of which has its own peculiar hazards.

Though he may have earned a bit of personal goodwill from European leaders, Papandreou must contend with a hostility toward his country that is hard to overstate. Since joining the European Community in 1981, Greece has developed the image of a chronically reckless player that extorts money from the common kitty and mismanages its own affairs. The fury toward Greece has reached new levels of intensity during the current crisis. Part of that is displaced anger, as the psychologists call it, in that EU technocrats had every reason to know that Greeces deficit numbers were dodgy but signed off on them anyway. Mostly, though, its an anger born of fear.

A messy showdown between Greece and the EU could do huge damage to the European monetary system and its global standing. The euros reputation might just survive a bailout of Greece if it were linked to tough economic conditions. However, two other scenariosa Greek default, or a bailout with no convincing promise of better behaviorwould shake the system to its foundations. World markets would draw negative conclusions about the EUs ability to handle crises that could be looming in other euro zone countries (such as Portugal, Italy, and Ireland) where public finances are rocky. So the near-daily scoldings of Greece emanating from Brussels and Berlin, and calls to send emissaries to Athens to audit its books, are partly intended to influence Greece and increase the chances that it will clean up its own fiscal act, with no extraordinary financial help.

But even as he attempts to calm his impatient European colleagues, Papandreou must contend with an electorate in which a culture of entitlement and feelings of victimization by foreigners are alive and well. If he pushes too hard to trim government spendingand especially if he is seen to be doing the bidding of other countrieshe could face debilitating and even violent protests by unions, anarchists, and others, an all-too-common phenomenon in Greece. In December 2008, Athens was gripped by nearly three weeks of furious rioting, after a teenager was shot dead by a policeman. The mishandling of those riots was a symptom of poor leadership and morale in a police force that the public regards as dishonest and, by turns, negligent or brutal.

Papandreous efforts to fight corruption will also provoke harsh counterreactions from powerful interest groups that would be threatened by any alteration in the present state of affairs. Corruption is endemic to the system in Greece, from the civil servants who take bribes to the companies who pay bribes to secure contracts. Transparency International, an anticorruption watchdog, places Greece seventy-first on its global clean government index, a remarkably poor rating for a relatively developed member of the EU, putting it alongside newcomers Bulgaria and Romania. A TI survey found that the average Greek family pays nearly $2,000 a year in bribes, usually just to induce civil servants to process paperwork a bit more quickly.

Corruption and high state spending dont invariably go hand in hand. Some extravagant states, like Sweden, are cleanand there are some corrupt places with manageable budgets. But in Greece, the link is strong; corruption, combined with poor public services, helps drive the countrys deficits in a number of ways. One is plain old waste. Vast sums are gobbled up, in poorly recorded ways, by state hospitals, which are notorious for their subpar care. These establishments often buy expensive equipment (in deals that bring handsome rewards to the individuals concerned) that then goes unused. Another budget wrecker is tax evasion, which is far more widespread in Greece than in similarly prosperous parts of Europe. The average Greek citizen, forced to accept inferior public services or pay bribes to get around them, is understandably not inclined to pay his or her fair share of taxes. This problem is compounded by a tax system that is arcane, vague, and quite punitive for those who are not prepared to dodge or bribe the tax inspectorsa service that the affluent take disproportionate advantage of. There are fast-expanding neighborhoods of Athens where the fine art galleries, designer fashion boutiques, and well-watered gardens recall the wealthier suburbs of Los Angeles or Miami. On the more fashionable Greek islands, wealthy Athenians are snapping up second homes at a pace that the crisis has yet to dent. Yet as an aide to Papandreou points out, the number of Greeks who declare incomes of 100,000 euros or more is less than 5,000, an absurdly low figure.

Finally, the corrupt and predatory nature of government bureaucracies makes starting or growing a business in Greece a nightmarish experience, which means fewer new private-sector jobs, slower economic growth, and lower tax revenues. The owner of a small firm in Athens, turning over about 3 million euros per year, recently had to pay a bribe of 30,000 eurosnot to avoid tax, but to induce the inspectors to scrutinize and validate his books a bit faster so he could get on with developing his business. Because of costly hassles like this, too many of Greeces well-educated and naturally entrepreneurial people shy away from starting new enterprises and instead scramble desperately for government employment, no matter how miserable the work. This puts pressure on politicians to hire them, which bloats the civil service even more.

One can be forgiven for thinking that corruption and dysfunction this deep and widespread is not amenable to change. And Papandreou is hardly the first Greek leader to promise reform. His conservative predecessor Kostas Karamanlis came to power in 2004 pledging a crackdown on corruption. His party lost last falls election largely because of scandals involving his own cabinet ministers. People close to Karamanlis insist that on taking office he was sincere in wanting cleaner government; by the time he stepped down, however, he had virtually despaired of solving the problem. That story can certainly support a cynical view of the Greek capacity for reform. But the election result can also be read as a sign that the Greek electorate is truly fed up with corruption and demanding change.

To that end, Papandreou has taken a series of modest but, in the Greek context, striking actions. Weeks after taking power in December, for instance, one of his junior ministers was forced to resign after leaked documents suggested that he had been doing petty favors for friendsmodest, everyday sins that almost no one would have been disciplined for in previous governments. His administration has also begun televising cabinet meetings and implementing an open applications process for senior public-sector jobsagain, seemingly small steps, but significant in that the breeding ground of corruption in Greek government has long been its opacity.

Whats likely to come next, say those close to Papandreou, are investigations and prosecutions of some big-time practitioners of corruptionpowerful civil servants, for instance. The authorities also hope to challenge politically connected government contractors, especially in the construction sector. These are the kind of people who for decades have seemed untouchable. Such moves could be risky. But they would send beneficial shockwaves throughout the bureaucracy and Greek society.

As aides to Papandreou point out, a crackdown on corruption may also be necessary for security reasons, regardless of the financial pressure. Over the last two decades, thanks to its geographical position, Greece has become a way station for the illicit trafficking of money, narcotics, and human beingsincluding women and childrenbetween the Balkans and points east, and Western Europe. This illegal trade is bound to create temptations for public servants who are already prone to corruption. Papandreou is well aware of the deep and crippling nexus that has developed between governments and organized crime in neighboring Balkan countries. He and his advisers want to make sure something similar doesnt happen in Greece.

As the longest-standing EU member in southeastern Europe, Greece should in theory be exporting stability to its neighbors. But not for the first time, there is a real risk that, instead, regional instability will infect Greece and in the process morph into something worse. Fortunately, though, Papandreou has a track record as a transformer of Greeces regional diplomacy, and the story of that experience provides clues as to how he might manage the current fiscal crisis.

I n February 1999, Papandreou was appointed foreign minister of Greece at an especially tense and dangerous moment in the countrys relationship with its arch-nemesis, Turkey. The crisis was precipitated by a Greek embassys alleged aid to Abdullah Ocalan, the leader of a violent Kurdish insurgent group in Turkey. It was compounded a month later when war in Kosovo threatened to spread and engulf Greece and Turkey on opposite sides. To forestall that eventuality, Papandreou opened a quiet dialogue with Turkeys foreign minister, Ismail Cem. Then, in August, a huge earthquake struck Turkey, and a smaller one hit Greece three weeks later. The quakes triggered an outpouring of mutual compassion, and the two countries exchanged humanitarian aid.

Papandreou seized on this unexpected moment of sympathy to accelerate an audacious diplomatic realignment. One of the biggest problems between the two countries was Greeces veto on Turkey becoming a formal candidate to join the EU, something Turkey desperately wanted. Working with Cem, Papandreou set up a careful series of confidence-building steps that gave him the diplomatic space to lift the Greek veto without appearing to have compromised Greek interests. It was a Nixon-goes-to-China move that set Greek-Turkish relations on a new and profoundly healthier course. As a formal EU candidate, Turkey had to undergo difficult constitutional reformsreducing the militarys power, for instance. This further eased security tensions between the two countries, though they still exist.

Had you asked almost any professional observer of Greek-Turkish relations prior to 1999 whether reconciliation was possible, theyd have smiled at your navet. After all, Greece and Turkey had teetered on the edge of war for decades, since at least 1955. (There had been some periods of amity before that, but most people had forgotten.) Judging by the political rhetoric, which played on Greek memories of 400 years of Ottoman Turkish occupation, no ethnic hatred on earth seemed so implacable. Yet Papandreou correctly understood that behind the stereotype of Greek-Turkish enmity was a more subtle reality: not only fear and suspicion but also a mutual fascination based on memories of symbiosis as well as conflict. Today, while issues like the partition of Cyprus can still roil the relationship, the diplomatic temperature between the two countries is dramatically lower, and the cultural attraction continues apace, surfacing in music, films, and even soap operas (in recent years, three television series have celebrated Greek-Turkish love).

Having successfully disproved one culturally determinist maxim”Greeks and Turks always hate each other”Papandreou has now pledged to dismantle another: the idea that Greece, or at least the Greek state, will always be corrupt and dysfunctional and therefore likely to disappoint both its own citizens and its European partners. The latter challenge may be harder than the former. Changing foreign policy required Greek citizens to adjust their attitudes, whereas reducing corruption requires them to change their daily behavior. Ultimately, a cleanly governed Greece would have to break a national tradition known as rousfeti, a term that can cover anything from favor swapping to outright bribery. But just as Papandreou was able to tap the popular emotions unleashed by the earthquakes to engineer a new diplomatic relationship with Turkey, so too is there an opportunity for him now to channel the Greek publics disgust with corruption, and its anxiety about the fiscal crisis, into support for his campaign to clean up the bureaucracy.

Upon returning from his meeting in Brussels last December, he told his countrymen of the possibility that strict austerity measures would be imposed on the country by the EU. He warned that “for the first time since 1974, our national sovereignty is under threat.” That date, the year Greece and Turkey clashed over Cyprus, is the Greek equivalent of 9/11. By evoking it, he was cribbing from his fathers rhetorical playbook and appealing to the potent force of Greek nationalism. Yet he was doing so not to deflect criticism outward but to focus it inward. “It would be very easy if we said that the international crisis was to blame for everything,” he said in a news conference in January. “But I think the Greek people have understood that the situation we inherited had nothing to do with the international crisis. The international crisis is not to blame for the cronyism, the lack of meritocracy, the corruption. Those are our problems. And we have to restore good order and lawfulness to our country.”

To outsiders, such declarations might sound like statements of the obvious. But in a culture where fear of outside powers is still widespread, it takes courage for a prime minister to say that some foreign criticism of his countrys housekeeping and governance might be well founded. With a clear parliamentary majority and the prestige that his surname commands, Papandreou has political capital, and he has deployed it to drive home some hard truths.

But it remains a wide-open question whether Papandreous skillfully used capital will be enough to clean up Greeces public life and hence steer the country, and ultimately the euro zone, through its looming crisis. Although his government has announced a series of austerity packages, designed to bring the budget deficit down to 3 percent of GDP by 2012, many of its actions have been criticized in Brussels, and on the markets, as too little, too late. For example, Greece has been rebuked for failing to follow Irelandwhich has decreed a cut in real wages for public-sector workers.

In Athens, though, the political calculus will never be the same as it is in Brussels, Berlin, or even Dublin. Along with its crazy profligacy, the Greek state payroll has peculiar features, including overgenerous pensions, for which healthy fifty-year-olds are sometimes eligible, combined with miserable salaries for junior pen pushers. An across-the-board cut in salaries would devastate people who are already vulnerable, and destroy the consensus that Papandreou now enjoys. His anticorruption campaign also requires some fine judgments over which misdeeds to pursue. (Ordinary Greeks are open to changing their own misbehaviorpetty tax evasion, for examplebut only if they see that the notorious fat cats who rob the state on a huge scale are being brought to book.)

The idea that Papandreou needs to be given some space, and some credit for his sincerity in taking on his countrys fundamental weaknesses, may be exasperating for the political and financial masters of the EU. Greece has been given enough opportunities and failed to use them, many will say. But those critics should also realize that Greeces underlying problems will never be solved by the stroke of a bureaucratic pen. Tackling them will require a minimum of social and political consensus, and Papandreou has a better chance than any Greek politician in recent memory to generate that consensus. If he succeeds, he will have set an example that leaders of other countries beset by corrupt bureaucracies can emulate. If he fails, the outlook for Greeceand for the EUs ability to manage the problems of its shakier membersis very bleak.

Bruce Clark is international news editor at the Economist and the author of Twice a Stranger: The Mass Expulsions That Forged Modern Greece and Turkey.

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