A lot of friends abroad ask me the same question: "What has led up to the current financially hard situation in Greece?". I found this excellent article from NY Times called "Can Greeks Become Germans?", which summarizes the problem in a very detailed way. I'll quote some large sections here, for reference.
[...] Germany is the epitome of a country that made itself rich by making stuff. Greece, alas, after it joined the European Union in 1981, actually became just another Middle East petro-state — only instead of an oil well, it had Brussels, which steadily pumped out subsidies, aid and euros with low interest rates to Athens.
Natural resources create corruption, as groups compete for who controls the tap. That is exactly what happened in Greece when it got access to huge Euro-loans and subsidies. The natural entrepreneurship of Greeks was channeled in the wrong direction — in a competition for government funds and contracts. To be sure, it wasn’t all squandered. Greece had a real modernization spurt in the 1990s. But after 2002, it put its feet up, thinking it had arrived, and too much “Euro-oil” from the European Union went back to financing a corrupt, patrimonial system whereby politicians dispensed government jobs and projects to localities in return for votes. This reinforced a huge welfare state, where young people dreamed of a cushy government job and everyone from cabdrivers to truckers to pharmacists to lawyers was allowed to erect barriers to entry that artificially inflated prices.
European Union membership “was a big opportunity for development, and we wasted it,” explained Dimitris Bourantas, a professor of management at Athens University. “We also did not take advantage of the markets of the [formerly] socialist countries around Greece. And we also did not take advantage of the growth of the global economy. We lost them all because the political system was focused on growing public administration — not on [fostering] entrepreneurship, competition or industrial strategy or competitive advantages. We created a state with big inefficiencies, corruption and a very large bureaucracy. We were the last Soviet country in Europe.”
That is why, he added, that Greeks, when they move to the U.S., “unleash their skills and entrepreneurship” in ways that enable them to thrive in commerce. But here in Greece, the system encourages just the opposite. Investors here tell you that the red tape involved in starting a new business is overwhelming. It’s crazy; Greece is the only country in the world where Greeks don’t behave like Greeks. Their welfare state, financed by Euro-oil, has bred it out of them.
With the decline of Beirut and Dubai, Athens should have become the service center of the Eastern Mediterranean. Instead, Cyprus and Istanbul seized that role. Greece must not waste this crisis. While it has instituted some reforms in the last year, Prime Minister George Papandreou said to me, “What is most frustrating is the resistance in the system. How do you produce a change in culture?”
It will take a cultural revolution. And that can happen only if Greece’s two major parties come together, hold hands, and collectively force through a radical change in the governing culture from the top down. Without that, Greece will never be able to pay back its loans.
Update 6 Mar 2012: Following my respectful discource policy, I've annotated some flamebait parts of the comments on this thread. I don't like removing comments or moderating, so I chose to annotate and link to the relevant post where further information and discussion can take place.