I think it was Warren Buffett who said that when the tide goes out, you can see who's been bathing without their swimsuits. So it has been with Europe in these days: we are now seeing the continental Empire's New Clothes to be much less substantial than we thought.
The sins of the Euro, as regards Greece and Italy, were largely committed long ago. The rules of admission, having to do with size of budget deficit and national debt (as a percentage of GDP) were fudged for Italy at the Euro's founding in 1999; then
more brazenly so for Greece when it joined just a couple of years later, then these sins were swept under the rug since.
Now, having let these serial road-can-kickers in the club in the first place, and having compounded the mistake making their admissions irrevocable (instead of maintaining their old currencies, the lira and the drachma, on a shadow basis), the European authorities really have no choice but to make good on their sovereign debts, while compelling the national governments to start to follow the fiscal requirements they should have had to follow all along.
Politically, this is unpalatable in a variety of ways. Most significantly, though, it is that the situation has forced the regional powers that be (really it's the national governments in Germany and France) to impose rather nakedly their power through the European Central Bank. The requirements--for revenue enhancements and spending cuts, particularly for employees in government agencies and enterprises-- placed upon these governments have caused each country's parliamentary government to lose political control, succeeded now by willing, bankerly technocrats without political constituencies.
The austerity being imposed upon Italy and Greece, and the unelected governments that have been chosen to impose them, will no doubt be bitterly--even violently--resented and resisted by those two volatile societies. The irony, commented upon and lamented by some in these days, is that these two nations which in ancient times defined our original notion of what a "republic" is, now have lost political control of their economic destiny.
The fact is that these two countries have had very weak democracies throughout the postwar period; their people were poorly led and not doing much following, either. Like the Soviet workers who pretended to work while their government pretended to pay them, in Greece and Italy the companies and individuals pretended to pay their taxes and their governments pretended to have authority.
For Italy, at least, this crisis has already had one good outcome: what appears to be the definitive exodus from government of the Great Clown, that "Bounder", the Gentleman who is no gentleman, Silvio Berlusconi (it also appears that Umberto Bossi, head of the odious Lega Nord, will oppose the new government, a big plus as far as I'm concerned). The former political opposition, the center-left coalition which has traditionally governed with ineffectual honesty, as the alternative to Berlusconian disrepute and corruption, will have a good opportunity to provide implicit support for the needed reforms in the national interest, so they can claim credit if they work and disavow them if they don't--clearly a good position. Italy is not a player on the world stage, but it is a first-class prize for Europe, and as one of the original six members (with France, Germany, and the Benelux), dismissing it from the club would be unthinkable.
For the Greeks, the failure of the Socialist government will be borne bitterly, as it will be felt to have betrayed its supporters, then fell short of its aims. The right will gain power as a result of the Socialists' failure, but the timing will make its ascension a poison pill. Politically, I see the country wandering in the political wilderness for a long while, which could make it vulnerable both to vindictive forces in Europe looking to punish it, and to its hostile neighbor, Turkey, which now has a well-founded grudge against the EU. If the EU were to punish Greece beyond its capacity to accept humiliation, look for a shocker--a "historic compromise" with the Turks!
What the whole story illustrates is the internal contradiction in today's European Union, with its combination of strong and weak national economies, a centralized currency, and a weak central government. For those who remember the early days of American history, I would suggest that Europe is going through its Articles of Confederation moment. Even the Euro's legitimacy within the EU has big problems: think of how problematic the dollar would have been in those days if Virginia (think: the U.K.) had stayed out. We realized we needed a stronger central government, but it didn't come easily. Our Constitution, mighty as it is today, barely passed in several of the states, and we had to weather our Shay's Rebellion, our Burr-led Western Secession movement.
History doesn't exactly repeat itself, and it could go the other way with Europe, toward fragmentation and reasserted national sovereignty. The stakes are higher today; we're not talking about fledgling republics with a toehold on an undeveloped continent. I say that Americans should continue to provide quiet support and patience for them to work it out, and, most of all, refrain from gloating.