The fearful dance of the Dow with the Greece-plagued euro points to a new reality that could either warrant or undo the Keynesian recovery of the U.S. economy: We’re all in the euro zone now. What happens in a relatively small European country—and the possible replays and reactions among its neighbors—could drive Europe back into recession and take the Unites States along for a downward ride.

This is the result of Europe’s continent-wide common currency, driven more by political will than sound economics, which prevents nations from devaluing their way out of trouble as they have in the past. Banks and investors treated the sovereign debt of Greece as if it were only a little less secure than German bonds. After all, isn’t the euro as sound as the deutsche mark it replaced—and don’t Berlin and Paris have to make sure it stays that way, from Lisbon in the west to Nicosia in the east?

Perhaps not.

As Europe convulses, Wall Street trembles, with equities suddenly losing 10 percent of their value in what had been a rising market. Who knows what contagion lurks in seemingly safe investments that could now prove worthless if the euro’s guarantees succumb to a domino wave of bank failures in vulnerable member states? That’s how Greece, with a GDP approximately equal to that of the Dallas–Fort Worth metroplex, casts a shadow over the entire world economy.

The danger is compounded by a fiscal cure that could be nearly as harmful as the financial disease. As a condition of Europe’s bailout plan, and of continued euro membership, the continent’s debt-ridden economies must slash spending drastically—and at just the wrong time in the economic cycle. The impact will be higher unemployment, lower wages, and reduced consumer demand.

These negative effects will be amplified by conservatives now in power from Germany to Great Britain, which does not belong to the euro zone, but is the EU’s second largest economy. Now, however, the expedient coalition of the Conservatives and the Liberal Democrats (the latter are quickly proving to be neither) has embraced a budget-slashing approach that will cost jobs and, as the Financial Times wrote, roil market traders concerned about the “impact … [on] economic growth.” Of course, once recovery has gained strength, governments everywhere will have to bring down deficits and debt. But not too soon or too fast: As The Guardian observed of the British government’s budget cuts this week, this is economics “straight from the Chicago school” that “risk[s] an economic death spiral.”

Europe’s sovereign debt crisis could escalate, even as national budgets contract, prompting a relapse into recession across the continent. And the U.S. could almost helplessly follow, with profound consequences for President Obama and progressive politics in this country. The New Deal model that the administration has pursued may turn out to be a necessary but insufficient condition for sustained recovery in a world transformed since the 1930s. When FDR was in the White House, trade accounted for only 5 percent of U.S. GDP; in the past decade, it soared to 30 percent, with commerce and financial transactions crossing the globe at the speed of light. During the New Deal, the United States could—and did—adopt an almost wholly nationalist strategy for a largely self-contained economy. In 1933, when the London Conference proposed a deflationary program fixing the exchange rate of the dollar to the pound, Roosevelt torpedoed the negotiations, insisting that “the internal economic system of the nation is a greater factor in its well-being than the price of its currency … [compared to that] of other nations.”

Today, for leading economies, the external is internal—except perhaps for China, which with its bridled system of enterprise grew continually through and rapidly after the global trauma of the past two years. Indeed it was China’s assurance this week that it would keep investing in Europe that sparked Thursday’s rally in global stock markets. It was also a startling sign of the shifting balance of power in the world economy.

But if the turnaround is only temporary, the United States could face a series of hard choices internationally and domestically. The Clinton administration intervened decisively in the 1990s to counter the Russian and Mexican currency collapses; it’s hard to imagine Americans tolerating another massive bailout now—this one for Europe—even if it would be in our national interest. Similarly, in the event of double-dip recession, how could the president push a double-dip stimulus through Congress at a time of already record deficits—and in the teeth of a conventional wisdom that increasingly sanctifies budget restraint?

We may move past the danger because America’s banker, China, already the largest holder of our bonds, can function in effect as the world’s bailer-out-in-chief. But the larger lesson is clear: The Obama administration may have done many things right and some things at least half-right to lift the American economy, but there is no guarantee that such actions will work in an era when national economies are integrated, but national policies are not.

So the crisis this time could be bad—or averted. The crisis next time could be worse. For years, former British Prime Minister Gordon Brown called for a “global New Deal” matched to the realities of a globalized age—an international safety net to anticipate and contain financial emergencies in one country or region that could rapidly infect the world economy. But nationalist instinct and political expediency have outlasted the old order of insulated markets and commerce. Even now, the British and French governments favor a tax on banks not as a mechanism to cope with bank failures, but simply to raise their own domestic revenues.

The United States could get lucky this time—and perhaps even hit a modest winning streak in the global casino. But until the globalization that can’t be unwound is tempered by global financial reform that can’t be evaded, every nation, no matter how big, could pay dearly for whatever happens in any other nation, even one as small as Greece. Anyone, including the U.S., could be left holding the euros.