Greek default would cause problems even for American banks. (Creative Commons)

European leaders have been criticized for their inability to contain the sovereign debt crisis, contributing to volatility in the global financial markets and raising doubts about the future of the euro and European integration.

The German Parliament voted on Thursday to expand the eurozone bailout fund, increasing its contribution by about $287 billion, but experts dismiss the measure as too little, too late.

The Greek debt crisis “could have been fixed in January 2010, when the overall problem was about 40 billion euros,” or about $50 billion, said Lord John Eatwell, a professor of economics at the University of Southern California.

Eatwell compared the European debt crisis to that of Mexico in 1994, which was solved in three weeks by about $75 billion in U.S. aid. “[Investors] said, ‘Oh, okay, fine, we’ll lend to Mexico again.’ And, once the guarantee was in place, it was never used.”

In fact, Eatwell pointed out, the U.S. made a profit of $500 million on the loans and loan guarantees.

Opposition to a Greek bailout is futile. Greece has “an enormous volume of debt,” which it cannot pay. Essentially, there are two solutions to the Greek debt crisis: The eurozone either bails out Greece or it defaults.

A default would bring French and German banks, which have lent to the Greek government, to their knees, and “the banks would then have to be bailed out,” Eatwell said.

In addition, the opposition of European leaders to the bailout is particularly damaging to a global recovery.

“The more that [the bailout] is opposed, the bigger the uncertainties become, the greater the panic becomes, and the more money is shifted out of Greece into other euro-denominated bonds,” Eatwell said.

It’s a downward spiral that would trigger a domino effect throughout the eurozone, possibly spreading to Ireland and Portugal, as well as the larger economies of Italy and Spain.

American banks would not be immune to the euro-mess, Eatwell said.

Eatwell joins Timothy Geithner, U.S. Treasury secretary, in criticizing Europe’s crisis-containment strategy, which has included austerity measures in Greece that have prompted strikes and protests in Athens.

“This is perhaps the most unpleasant aspect of the whole crisis, in the sense that, obviously reform is necessary in Greece, but everybody should be focused on solving the crisis, not punishing somebody,” Eatwell said. “Let’s solve the crisis first and deal with political reform afterwards."

The expansion of the European Financial Stability Facility, as the bailout fund is formally named, may calm financial markets temporarily, but it delays real solutions.

“Even given the most competent and far-sighted political leadership, the current eurozone institutions would not work,” Eatwell wrote in a Newsweek article in August.

The institutional structure of the monetary union in Europe needs to be reformed, he said, to create an effective and powerful government. 

“The most important thing for anybody to take away [from the eurozone debt crisis] is that economic systems require effective and powerful governments to operate in a stable manner. You cannot step away from the need for effective government in running monetary policy [and] in running fiscal policy, which means taxation and spending,” Eatwell said.

“Without an effective government," he added, "you will have exactly the sorts of problems which have appeared in Greece in one way or another.”

Reach contributor Alexandra Babiarz here.