Did Europe just save Greece with this bailout?

Not yet, and probably never. Greece's debt burden as a share of GDP is 140% and growing. Even with a 50 percent haircut, it would still face a fierce structural problem. The only longterm solution is for the country to revert to its own cheaper currency.

If Europe can't save Greece, why is it trying?

Greece is a small economy. At $300 billion, its GDP is a tenth the size of Germany. But for the European Union, it still qualifies as too big to fail for two reasons. First, hundreds of billions of euros of Greek debt are on the balance sheets of Europe's largest banks. Second, if Europe lets Greece default, investors will interpret this as an indication that nobody is safe. That would make the debts of Italy, Ireland, Spain, and Portugal much more risky. Risky debts are more expensive debts. More expensive debts means more bailouts.

Europe probably can't save Greece. It can only save itself by propping up Greece until it's no longer technically too big to fail -- by (a) guaranteeing Athens' debts until Europe's largest banks are in a better position to take losses or by (b) backing its debts until Europe's other troubled governments solve their own problems.

What happens next?

The waiting happens. The world better get used to a slow-moving Europe, because the EU is in this for the long haul -- emphasis on the haul. Stronger European countries will provide money to the weaker countries in exchange for control over their tax-and-spending policy. The next few years will be a tug-of-war between national politics (Politician A: "We all have to make sacrifices"; Politician B: "We're losing our national sovereignty to German national bankers!) and international politics ("We're taking your national sovereignty for the good of Europe").

What does it mean for the U.S.?

First, a note of comparison. Even serving as the catastrophic insurance provider for the U.S. economy, Washington is finding it very easy to get financing from other countries and banks who have every expectation that they'll pay the money back. Our 10-year borrowing rates are 3 percent. Athens has hovered around 18 percent. We're not Greece.

What does the European debt crisis mean for our economy? American banks have very small direct exposure to the debts of the four peripheral countries in the crisis: Portugal, Ireland, Italy, and Greece (i.e.: the PIIGs). But they have significant exposure to the largest banks in France and Germany, and our economic fate is interwoven with the large European economies. If a debt crisis pulls Europe into a second recession, you won't need the international news section of a newspaper to tell you. Trust me, you'll know.





