If the American economy were not so intertwined with trading and banking partners in Europe, and if European demands for severe austerity measures in Greece in return for a second-round euro bailout did not mimic so much of the Republican fiscal dogma being touted by the party's presidential contenders, the bailout of Greece might not be so noteworthy here. But as it happens, both conditions apply, in spades. The United States has a huge interest in the fiscal outcome in Greece and euro-zone, and there is much to be learned about the unmentioned consequences of recklessly slashing government spending in a period of economic fragility.
Greece's dilemma, to be sure, is of its own making. Greece long fudged its financial figures to the European bank to keep its bond rating up, while its leaders knowingly dithered on the hard issues of market-based economic reform that might have prevented its slide toward bankruptcy.
Since Greece's sovereign debt crisis materialized, however, Europe's richer euro countries -- especially Germany, the euro-zone's powerhouse economy and chief creditor -- have done their part to drive Greece toward insolvency in return for an ongoing bailout, now up to $170 billion. They have, for instance, insisted that Greece deeply cut its government debt and deficit spending by slashing government spending on wages, public-sector jobs and public services, including public pensions and health care, which has now been decimated. They demanded those conditions while saner leaders were urging market-based reforms in Greece's closed labor markets, state monopolies and bloated bureaucracies, in conjunction with more affordable interest rates on bailout bonds.
The deep austerity cuts -- similar to those flogged by Republicans here to staunch government red ink -- have served mainly to reduce consumer spending and tax revenue, and to drive the economy deeper into a harsh recession, prompting recurrent riots in Athens by huge turnouts of angry Greeks. The country's economy shrank a whopping 6.8 percent last year, or two-and-a-half times what the International Monetary Fund had predicted in 2010. No wonder unemployment is now running upwards of 20 percent, or that Greece has been unable to right its economy and begin paying down its first round bailout debt.
The new bailout deal reached Tuesday by Greece with the European Bank and the International Monetary Fund may not be watertight, but it does raise hope that Greece will not default and will not leave the euro pact. Both perceived benefits renewed confidence, at least briefly, that Greece will not (yet) become the stalking horse for unraveling the euro-zone or for leading crucial investors out of Portugal, Spain and Italy, the zone's other weak economies.
But critical issues remain. As part of the latest deal, Greece is demanding that private holders of its government bond debt take a writing off 70 percent of the value of their loans. The other problem is that Greeks themselves see nothing in the austerity package that promises sustainable relief from their reduced pensions, wages, job prospects, mortgage burdens and health care. If such harsh consequences continue, they may yet decide its better to bolt from the euro, and that would launch bigger ripples against the risk of sovereign euro debt elsewhere. With Europe's leading economies now showing signs of recession, the ripples surely would lap across the U.S. economy.