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When you stroll around Athens or many other parts of Greece, you see gangs of feral yet endearing cats living off people’s handouts, apparently never wondering what would happen if their lifeline was suddenly cut off. Greece, in a way, has been like those felines, except suddenly the free lunch is over. For the umpteenth time—and not for the last time—Greece has been in the news over its huge government debt and the possibility of defaulting on its obligations. Secretary of State Hillary Clinton visited July 17–18 and met with officials, conveying the concern of the Obama administration. On July 21, European Union leaders will hold a summit, with Greek debt once again high on their agenda. Ad Policy

In a way, it’s a shame that Greece, rather than Ireland or Spain, has become the public face of Europe’s sovereign debt crisis. Neither Ireland nor Spain had huge public debts before the global economic collapse. Both were models of government transparency and accountability, and a case could have been made to the publics in Germany, France and elsewhere that they are deserving of a helping hand. Feline Greece, on the other hand, is a different story.

Most news reports about the Greek situation have focused on the dramatic mise-en-scène, with lots of graphic images of masked protesters, tear gas, police lines and the now-famous “Greece riot dog.” But what this sensationalist reportage has failed to note is that many of the protesters in Athens’s Syntagma Square have benefited from Greece’s corrupt political system, which lies at the heart of its fiscal problems. Public employees in Greece have been a core part of the patronage machine fostered by past governments, and many of those protesters are in the street precisely because Prime Minister George Papandreou is trying to dismantle many of the corrupt practices of that machine—which was largely created by his father, former Prime Minister Andreas Papandreou, and his party, the PaSoK (Panhellenic Socialist Movement). Since the 1980s, PaSoK has rotated in power with its main opposition party, New Democracy, each with its own patronage cadre of supporters.

Not only public employees have benefited from the corruption of the Greek “clientalistic” state, as Papandreou routinely calls it. Greeks are not the lazy, indolent workers depicted in many media portrayals—they work more hours annually than most Europeans, about 35 percent more than Germans and as many hours as Americans (though their on-the-job productivity is not particularly high). However, many Greeks rely on an informal “gray economy” of family and social networks, which too often operates on nepotism, backroom deals, bartering and tax dodging. Greece was plagued throughout the twentieth century by bitter schisms among monarchists, democrats and communists, with dictators and elected governments rotating in complicated power alignments right up to the 1970s, when the last military dictatorship withdrew and the monarchy was abolished. But by that time a system based on not paying taxes to the corrupt political bosses and relying instead on informal family and social networks had become the fiber holding it all together.

Today, although merit systems exist on paper and computerization of the public administration is gradually being introduced, almost everything still is done with a wink and a nod—securing jobs, permits, even doctors’ appointments or jumping to the head of the line for surgery. The practice of fakelaki (literally “little envelope,” the slipping of bribes to those in power)—has become a Greek tradition, celebrated nostalgically in films like Zorba the Greek. This “system” pervades every level of society, down to the neighborhood and household levels. Few Greeks have their hands entirely clean. Even fewer have fought to fix it.

During the current crisis, those networks and the massive gray economy have served as a kind of safety net; in the longer term, however, they will impede the modernization of Greece. This is because in an economy designed to provide for a mass society, you have to be able to count things. Revenues, expenditures, imports, exports, surpluses and deficits: all of these and more must be tracked as accurately as possible. But if everything is being done hush-hush, on the sly, in back rooms, without official receipts or records, with a bit of payola in the right palms for looking the other way (“There’s your ‘tax’”), the government can’t count anything. It can’t be sure of how much money it has to spend because it can’t be sure how much revenue has been taken in. So the government just makes up figures; deficits disappear with a few clicks of the computer mouse or the subterfuge of Goldman Sachs. “Foreign observers have long regarded Greek budget figures as mythological,” says Alec Mally, a former US Embassy economic counselor and longtime Athens resident.

Those practices are what got Greece into a lot of trouble when it was discovered in late 2009 that the previous New Democracy government—like the PaSoK governments that preceded it—had shamelessly lied about the size of its budget deficit. Suddenly the bond markets got spooked. In the old days, a devaluation of the Greek currency, the drachma, was the systemic pressure release valve that coped with downturns and held the economy together. Paul Krugman, Dean Baker and others have written approvingly of the merits of devaluation, but in Greek hands a devaluation was the equivalent of printing Monopoly money to finance the bloated and corrupt public sector and fuel each party’s patronage machine. With Greece now using the euro, that intervention no longer was available, and so the bond markets attacked. The rest, as they say, is history.

Thus, many of the Greek protesters—certainly not all, but too many—are resisting the types of changes that Greece desperately needs. They are actively obstructing the Papandreou government’s efforts, since they want their state-funded benefits no matter how unaffordable the debt. “Both of the main political parties are so linked to the public sector hiring binges of the past that downsizing the bureaucracy to a level Greece can afford has proven difficult,” says Mally. “There has been foot-dragging at every juncture because it hits at the core of their political bases, especially PaSoK’s.”

Certainly it’s true that Greece’s level of corruption, while debilitating, has been nowhere near the levels of Russia or Iraq, according to Transparency International. It’s also true that the Papandreou administration has made mistakes, and that has understandably fueled some of the protesters’ complaints. For example, the government has found it easier to impose across-the-board wage and pension cuts on central government employees and most pensioners than to cut operating and personnel costs in the state-run enterprises that include public transport companies like the Hellenic Railways Organization and the Public Power Corporation (the latter has been accused of blackmailing the government by periodically reducing power and causing rolling blackouts). Papandreou has also failed so far to prosecute large private-sector tax evaders who have connections or can threaten the government that they will pull their companies from Greece.

But given the seriousness of Greece’s predicament—the country had been living beyond its means for years by borrowing other people’s money, until lenders stopped wanting to lend anymore except at exorbitantly high interest rates—the current government has been working hard to push Greece toward a new course. As Papandreou has said, “Greece’s problems won’t be solved by restructuring its debt but by restructuring the country.”

Some pundits and analysts have tried to portray Greece as some sort of David going up against the Goliath of cold-blooded Eurocrats, bankers and the IMF. These narratives have compared Greece to Lehman Brothers, warning that a Greek default could once again collapse the global financial system. Such claims are exaggerated, and certainly not believed among many European leaders. In what has become a game of chicken between Greek and European leaders, the EU showed itself willing to accept the possibility of a Greek default before the latest parliamentary vote in late June over austerity measures precisely because the apocalyptic predictions of European or global economic collapse are not seen as credible. Unlike the situation with Lehman Brothers, which was lethal because it caught everyone by surprise, Greece’s situation is widely known, as is which banks are owed how much money. There are few surprises left.

Some of the same analysts and critics also have claimed that money loaned to Greece is not going to the Greek people; it’s going to pay off German and French banks. There is a degree of truth to this; governments in debt have to pay off their creditors, just like people or companies do (and those banks hold thousands of deposits from everyday people and mom-and-pop businesses that could be at risk if Greece defaults on its debt obligations). But this viewpoint ignores a crucial dilemma that plagues not only Greece but all modern economies. All of the world’s wealthy nations, including the United States, are faced with a fundamental question: How does a modern economy develop and foster a decent, middle-class standard of living for its people without relying on runaway asset bubbles, hyper-consumerism (which adds to global warming) and huge runups of public and private debt? If the EU simply wiped out all or part of Greece’s debts—which it could easily do, for Greece is a small country and it doesn’t owe all that much—what would push the Greeks to change? And if Greece can get away with such behavior, why not other countries? Greece’s situation, unlike that of Ireland or Spain, reeks of moral hazard.

For the most part the Papandreou government is doing the right thing, and it represents the best hope that Greece will transition to a modern economy. New Democracy has acted like the Republican Party in the United States, as an obstructionist force motivated solely by electoral calculations to resist any common strategy. Yet no matter which party is in power, the bill has come due, and Greece is paying for its past sins. The Greeks can blame their situation on the Germans, the IMF or the European Central Bank, but the fact is, those players are late entries to this longstanding drama. At this point, there simply is no easy way out.

Ominously, there are similarities between Greece and the US financial situation, and not just that both are weighed down by large public debts (as American conservatives, looking for opportunities to attack President Obama, have been quick to point out). The most troublesome similarity is in the way that both economies came to depend on unsustainable and even corrupt economic practices. In the United States, Wall Street has lurched from bubble to bubble, most recently via a housing mortgage octopus that entangled the American dream. From Main Street to Wall Street, from your local bank handing out mortgages people couldn’t afford to the large investment banks bundling those mortgages into derivatives and credit default swaps and reselling them again and again until they became “financial weapons of mass destruction” (as investment guru Warren Buffet called them), Wall Street’s destructive products became seeded throughout the global financial system. In both Greece and America the dysfunctional systems provided economic stimulus for a time—until the house of cards collapsed. Yes, Greece and America have more in common than Americans want to believe: both countries have development models that no longer work. Economic sustainability is the order of the day, but Americans have no clue about how to enact that.

While Greece’s current situation is difficult, it also has many positives. Those include a robust shipping industry and a prosperous tourism industry that benefits from an unsurpassed historical heritage and one of the most beautiful land- and seascapes in the world. When I interviewed Prime Minister Papandreou last October, he spoke about plans to boost the country’s renewable energy industry (especially solar and wind, since Greece has plenty of both) and about its advantageous geographic position as a gateway connecting Europe, Turkey and the Middle East. Papandreou has sharply scaled back Greece’s military spending, which, ridiculously, was the highest in the EU as a percent of GDP (it was even higher, percentage-wise, than that of the United States). And by slashing wages, which had risen almost 50 percent since 2000, led by the public sector, Papandreou hopes to make Greece more competitive (in Germany wages are up less than 10 percent over the same period). Greece is also blessed with exemplary physical infrastructure in its roads, ports and mass transportation (a good chunk of which was paid for by EU development funds), and the Greek people have a deep resilience. As one Greek colleague told me, “Something about Greece still works.”

At the end of this tumultuous process, the hope is that Greece will end up with a smaller and more manageable public sector that is less tied to political patronage, and will also have a broader, more reliable tax base and a more competitive private sector. Without determined pressure from its fellow Europeans, Greece never would have undertaken these measures.

The post–economic collapse world is less forgiving than its predecessor, and the bar for successful economic development has been raised. Greece is better off inside Europe than outside it. The European Union is the largest trading bloc in the world, with more Fortune 500 companies than the United States and China. But the price of admission to this European club has just gone up.