To be sure, I have been bearish on Europe.  From last week:

I remain something of a Euroskeptic at this point. At best, I think the Europeans will be kicking the can down the road for a few months.

It turns out a “few months” might have been wildly optimistic.  It was quickly evident that bond markets didn’t show the same enthusiam equity markets expressed for the supposed deal.  That was huge red flag.  The second red flag was the Bank of Spain announcing a stagnant 3Q GDP.  From the Associated Press:

The Bank of Spain suggested that the flat growth calls into question the government’s goal of reducing its deficit to 6 percent of GDP in 2011, from 9.2 percent last year…

…It said domestic demand fell because of lower government spending as a result of deficit-reducing austerity measures taken by regional governments and because of a moribund real estate market. Household and business spending posted small increases. Spain’s economic woes stem largely from the collapse of a property bubble.

The Bank of Spain said there is still time to meet the deficit reduction target by the year’s end but warned that fresh measures may be necessary.

Yes, you read that right…the Bank of Spain blamed missing deficit reduction targets on fiscal austerity and then suggests additional fiscal austerity as the solution.  And as all nations in the Eurozone increasingly pursue fiscal austerity, we can only expect the nascent European recession to deepen.  Eventually, the European public will have had enough of the downward spiral.  How long will it be before Spain decides to aggressively push for a Greece solution of “voluntary” debt relief?

Finally, a lynchpin in the European debt deal – Greece – apparently isn’t ready to abide by the terms of that deal.  The public pressure is now too much.  From the Financial Times:

Greece’s prime minister unexpectedly announced a referendum to approve a second EU bail-out deal for his austerity-hit country, less than a week after it was agreed with international creditors at a European Union summit…

…One senior EU official told the Financial Times that Mr Papandreou had appeared reticent about the components of the bail-out package during talks at last week’s summit of EU presidents and prime ministers but no one was prepared for the referendum announcement that came “like a bolt out of the blue…

…The vote would probably be held in January, when Greek bondholders were expected to sign up for a voluntary 50 per cent haircut being negotiated with the International Institute of Finance, wrapping up the new bail-out package. One Athens banker said: “This is a worrying decision by the prime minister. It could derail the whole process even before it’s properly started.”

Not only are the details of the grand European plan still in flux, but so are the broad brushstrokes!  Clearly, the Greeks have just brought back into play all the uncertainty last week’s summit was meant to dispell.  It is not unreasonable to think the Greek electorate is more willing to technically default and start from scratch than their leaders. Indeed, shouldn’t this be our baseline scenario?

Bottom Line:  Last week’s European Summit accomplished far less than even the reduced expectations going into last week.  The cracks began appearing before the ink was dry.  More worrisome is that the Greek leadership didn’t even believe they were on board in the first place.  Simply put, the world economy is no less fragile than it was a week ago.  And in that fragility still lies the recession risk for a still struggling US economy.

This post originally appeared at Tim Duy’s Fed Watch and is reproduced with permission.