Greek voters have spoken and narrowly approved a pro-austerity party. Instead of celebrating, bond markets raised Spanish interest rates in anticipation of further strains. Just how bad could the debt crisis get? In the best tradition of economists, who juggle issues with two hands using the phrase “on the other hand,” the answer is that the euro crisis is potentially, perhaps probably, serious for Europe with noticeable knock-on effects. But contrary to general expectation, the effects may be less severe in the rest of the world.

The notion that over-indebted countries with shrinking economies could solve their problems by having their badly impaired banks borrow money and buy more government debt from their floundering home countries has long seemed strange. It conjures images of two drunks staggering down the street holding each other up. Because Europe is not politically integrated, its politicians have trouble acting as if southern-tier economies deserve the same degree of support that the US federal government provides to struggling regions under a truly integrated federal system.

The result has been grudging, inadequate and late injections of funds that almost every commentator has called “kicking the can down the road.” The can is getting too heavy to kick, and as relief rallies in financial markets shorten from weeks to hours, we may be close to a real decision – a more integrated Europe or an unwinding of the euro.

Market participants have figured out that new loans are likely to make them junior partners and impose haircuts –reductions in amounts paid compared to the amount due on government bonds – much as Greece has done. Thus, investors require high interest rates, as the recent 7 percent Spanish yield on its debt shows. Such rates ensure eventual insolvency for highly indebted countries unless there is debt forgiveness or a bailout.

Germany must figure out if it wants the trouble and expense of bailing out its larger European export markets or cutting them off. President François Hollande has said he wants less austerity, but even France is vulnerable in the current circumstances. The Germans know that imposed austerity is unpopular and in any case Italy, Spain, Portugal and Greece together are too big to save. Europe is between a rock and a hard place. It cannot force “internal devaluation” through falling wages nor create enough growth to allow existing debt to be serviced.

What about the rest of the world? The US has only moderate exposure to the EU through its exports. US exports to the Eurozone are only 1 to 2 percent of US GDP. US banks, while more stable than their euro counterparts, have not fully disclosed their exposure through loans, bonds or derivatives, and this could cause problems. In addition, many US multinationals have heavy European exposure, and an EU meltdown would hit their profits and US stock values. While the direct impact of European contraction would further retard an already anemic growth rate and put more pressure on Congress to spend more or keep taxes unsustainably low, it would not cause a depression in the US. Deficit hawks are correct that overtime spending must grow less rapidly and tax revenues must grow faster. Stimulus spending and tax cuts – though necessary if the EU falters – would further delay critically necessary fiscal changes.

The euro crisis could be a greater challenge for China. While May exports have shown some strength, several quarters of credit tightening have reduced inflation and real growth in China. Because local officials are promoted when they report good growth, actual growth may lag behind official data, already showing a slowdown. Data on electricity growth, fairly reliable data and highly related to output, show low single digits of growth. Excessive real estate and industrial investment have created excess capacity. State enterprise monopolies and oligopolies and economic uncertainty keep personal incomes and consumption low at only about a third of GDP, compared to double that ratio elsewhere.

But the EU purchases over a fifth of China’s exports. If that shrinks, the government must figure out ways to boost demand without recreating the wasteful spending and bad loans common in the 2008-10 round of stimulus. China has more fiscal space than richer countries, but existing excess capacity and understated bad bank loans mean its leaders must move carefully or they’ll produce even larger problems going forward. Still, the outlook for China is that fairly rapid growth – 5 to 7 percent a year over the next several years – can be expected even with a European crash. A muddling-through scenario for the EU would put China 2 percent higher. China’s workforce is not growing so quickly, if at all, so such a growth rate may intensify existing political pressures, but should be enough to maintain stability.

India, another large country, is much less exposed to trade than China. India’s exports of goods and services were only 22 percent of GDP compared to China’s 30 percent. Furthermore, the Eurozone consumes less than a fifth of what India exports, so the total direct impact of a contraction would be unwelcome, but not overwhelming. The main constraint on India’s growth now is its snarled investment in electricity and infrastructure and poor governance. India could gift itself higher growth, but this would have limited impact on the rest of the world.

Most other large developing nations like Russia or Brazil or Indonesia rely on raw material exports to a much larger extent than China or India, which together with Europe are their major customers. If India and China slow down as Europe declines, the prices of these raw materials are likely to fall and this will reduce revenues, even if the quantities decline only modestly. This has already happened. Oil and copper, two indicative raw materials, are 25 percent off their recent highs. Coal, iron ore and many food commodities have followed this pattern. Further price declines are possible.

The joker in the economic deck is that while the direct impacts on most countries, Eastern Europe and Northern Africa aside, of a euro collapse are small to moderate, there could be a cumulative series of indirect impacts that set up a downward spiral. Initial positions are weaker. Most rich countries, including Japan, now have much higher debt to GDP ratios and/or lower interest rates than in 2008. The efficacy of fiscal and monetary policy is constrained; even where such policy would help, it may prove politically risky and unpopular.

The result is that financial markets are afraid. Investors are willing to buy 5-year US or German government debt for less than 1 percent annual interest – far less than the expected rate of inflation. This only makes sense if investors expect deflation, caused by weak economies, or see the possibility of a highly negative outcome and are willing to accept the near certainty of a mildly negative outcome instead. Indeed, the ability of economists to understand complex linkages, feedback and psychology is limited and the relatively modest slowdown predicted, for example, in recent International Monetary Fund and World Bank analyses could be well off the mark if the negative-feedback loop intensifies and reactions continued to be slow.

The world economy will probably pull through with anemic growth, but it could be much worse.

(David Dapice is associate professor of economics at Tufts University and the economist of the Vietnam Program at Harvard University's Kennedy School of Government. This is republished with permission from the Yale Center for the Study of Globalization.)