The European Union’s ambassador to the United States had soothing words when he spoke at the University of Iowa in March. The continent’s economy was coming around, he said. Times were difficult, yes, but a plan was in place to deal with Europe’s sovereign debt crisis: budget cuts, structural reforms, a bailout fund, and eventual economic growth.

“His main point was that Europe was turning a corner,” says Enrique Carrasco, a professor of law who hosted the visit of Ambassador Joao Vale de Almeida to the College of Law on March 28. “Unfortunately, two months later, we’re back here again.”

Enrique Carrasco

Where we are is Greece nearing a Eurozone exit, and Italy and Spain facing a possible bailout in a crisis that’s gone global, stalling economic recovery in many countries, including the United States. Growth is slowing even in the so-called BRICs—Brazil, Russia, India, and China—countries with economies that had been booming even through the global recession.

Carrasco says that although experts have some idea of the repercussions of a country like Greece withdrawing from the monetary union—massive capital flight, probable collapse of Greek banks—nobody really knows how bad the crisis will get, or whether it could lead to the collapse of the Euro.

Carrasco says the crisis exposed a major weakness in the European Monetary Union. The lack of a fiscal union allowed several European countries to amass unsustainable public debt with no ability to pay it back, requiring crisis intervention by Eurozone countries—mostly Germany—and the International Monetary Fund. Austerity measures have caused economic stagnation and high unemployment in countries like Ireland, Italy, and Spain. The most significant problems are still in Greece, which is mired in a deep recession and unlikely see desperately needed economic growth anytime soon.

Now, the crisis is exacerbated by voters tired of years of austerity budgets, as reflected in the recent election results in Greece and France. There’s even serious, nontheoretical discussion that Greece may withdraw from the Euro zone, a conversation Carrasco said is extraordinary.

“A year ago, few politicians or policymakers would dare speak openly of Greece’s withdrawal from the Eurozone,” says Carrasco, an international finance expert and director of the UI Center for International Finance and Development. However, he said such a move would probably only push Europe even closer to economic apocalypse (making it appropriate that “apocalypse” is a Greek word).

“I don’t think it’s possible for Greece to withdraw without causing serious disruption in other countries and spread contagion to Italy and Spain,” says Carrasco. If that happens, he said that without additional precautions borrowing costs will likely skyrocket for the Italian and Spanish governments and investors will bail on those countries.

“It’s not clear that investors will distinguish between Greece on the one hand and Spain and Italy on the other,” says Carrasco. “They should, because Greece’s economy is much smaller and weaker, but the term “contagion” suggests that investors may act irrationally and follow the herd.”

He says the crisis puts European political leaders in a bind. Do what the investors and EU technocrats want—cut government spending and deficits—and you risk being thrown out of office by voters who are struggling financially and need government assistance to survive. But do what the voters want—restore government spending and increase debt—and investors will flee, slowing the economy further and making it even more difficult to pay off sovereign debt.

“We’re vividly seeing in this crisis how the power of the sovereign state has been diminished by globalization,” says Carrasco. “Politicians can talk about pro-growth policies instead of strict austerity—they actually argue without explaining that you can do both—but in many cases they are restricted in what they can do by international investors. If you scare investors away, what are you going to do? Governments can’t ignore investors.”

What is the ultimate fate of the euro and the Eurozone? Again, no one knows, Carrasco says.

“Although history can tell us something about the demise of monetary unions, we can’t use historical examples to predict with complete accuracy the fate of the Eurozone,” he says.