Greece on the Skids

Greece's Prime Minister George Papandreou. Kostas Tsironis / Bloomberg-Getty Images

The cocktail reception for the prime minister of Greece was to be held in the Rotunda of the Pierre Hotel in New York City, where trompe l'oeil frescoes show New York socialites mingling with ancient deities. The setting, a prelude to a $1,000-a-plate dinner, would have been a fitting backdrop for the launch of George Papandreou's weeklong visit to the United States. The Minnesota-born politician, after all, is almost as American as he is Attic. His critics say he's imperious, trying to reinvent a whole people. And much of the financial world has decided his extraordinary efforts to save Greece from collapse (and Europe from financial chaos, and the world from another massive economic shock) are, like the frescoes at the Pierre, a thin façade meant to fool the eye.

In the event, Papandreou didn't even make it to the party. Just hours before he was to fly from London to New York, he suddenly canceled all his appointments at the United Nations, the International Monetary Fund, and the U.S. Treasury, and headed back to Athens. At an emergency cabinet meeting his government agreed to cut tens of thousands more public-sector employees from its payroll, albeit gradually, and to tax incomes as low as €5,000 a year. In return, Greece probably will get a desperately needed €8 billion, paid from a massive rescue fund set up by the IMF, the EU, and the European Central Bank (now known as "the troika"). But the pressure continues for Papandreou to cut ever more deeply into the public sector (jobs, benefits, pensions)—and thus into the core support of his Socialist Party.

At cabinet meetings, the atmosphere of doom hangs so heavy in the air that ministers sometimes seem just to be going through the motions of debate. "There is a sense of inevitability," says one. The medicine has to be taken. But as another senior Greek official asked aloud, "Will the medicine kill the patient?"

It's at times like this that Papandreou's friends like to talk about how cool he can be under pressure, and about one particular incident from his childhood. In 1967, when Papandreou was 14, the Greek military seized power, and soldiers went to his house in Athens looking for his father, former Socialist prime minister Andreas Papandreou. They couldn't find him, but they figured he was still around. So one put a gun to young George's head. "Andreas, come out, wherever you are hiding," said the officer, "or I will shoot your son." Harvard economist Richard Parker, a family friend since 1973, says that was "George's introduction to politics." (Andreas did show himself.)

"George had to make deep decisions as he was growing up about what kind of man he would be," says Parker. "For a long time he resisted going into politics." In fact, this son and grandson of prime ministers is something of a stranger in his homeland. For much of his childhood his father was teaching abroad or in exile. He lived in the United States, Canada, and Sweden. He went to Amherst College, Stockholm University, Harvard, and the London School of Economics (he occasionally still makes mistakes in Greek grammar). In many circles, despite his dynastic credentials, "he's seen as an American-Canadian-raised kid who doesn't basically understand the Greek character and is trying to do reforms the way you might do them in Denmark," says John Psaropoulos, former editor of the English-language Athens News. "His heart is in the right place, but he's kind of hapless." The term "consensus builder" is used against him these days, as are analogies with the ever-compromising American President Barack Obama. Many Greeks think "he lacks the political balls to say this is what he is going to do and get it done," says Psaropoulos.

Perhaps. But what Papandreou says he wants, in fact, is to change the entire way Greece and the Greeks go about their business. Slowly, perhaps too slowly, he has made some progress. He is pushing for much greater accountability and efficiency in the bloated public sector. He has brought down the deficit. He has tried to come up with novel ways to collect taxes in a country where records are still kept on paper. He has tried to free the private sector from the entanglements of bureaucracy. But Papandreou is constantly fighting what Parker, now an informal adviser, calls "the narrative of the wastrel state."

Greece is a country where it's said, only half in jest, that everyone rips everyone off because everyone feels somebody else is going to rip them off. And that includes, of course, their own government. When Papandreou took office in 2009 he discovered the books had been so cooked that the deficit turned out to be not 3 percent of GDP, which was the target, or 6 or 7 percent, which was claimed, but a whopping 13 percent. No, scratch that. It was 14 percent. No, wait a minute—the more the government finds out, the worse the picture looks, and the current calculation of the deficit Papandreou inherited is now stated as 15.5 percent of GDP.

Papandreou ran on a platform of transparency, and when he started making these figures public, the markets were stunned. "One thing was clear in everyone's mind: that Greece and the Greeks had to be quote-unquote punished," says Foreign Minister Stavros Lambrinidis with evident irony. (An Amherst grad himself, he was speaking to the same crowd at the Pierre that had been stood up by Papandreou the day before.)

Hedge funds, sensing volatility like sharks sensing blood, closed in on Greece. Its debt skyrocketed far beyond its ability to pay, getting worse as speculation grew that the country might default. The downward spiral was only slowed, not stopped, by the massive bailout package of €110 billion that Europe agreed to in 2010, followed up this July by another package of €109 billion. But to get that money, targets have to be met. And that gets harder to do because the European economy, generally, is slowing down. Greece's economy has shrunk this year by an estimated 5.3 percent.

So the question of whether Papandreou really can transform international attitudes about the Greeks—and the Greeks' attitudes about themselves—becomes almost as crucial as the numbers. "Economy is psychology," says Foreign Minister Lambrinidis. Greece has to convince the international community—especially the French and Germans, whose money is so vital to Greece—that it really is changing. If they don't believe that's the case, they can't and won't continue working to stave off default.

But the Greeks are getting restive. They've never been shy about taking to the streets when they feel they've been wronged. Parker went with Papandreou this past summer to a town-hall meeting in a remote village in the far west of the country. Papandreou listened for hours to complaints and suggestions from about 100 townspeople. This was the Greece of the taverna, deeply Mediterranean, deeply resistant to change that compromises its relaxed way of life. Papandreou talked about sacrifice. He never surrendered a point. He never lost his temper. And he took notes on his iPad.