Eurozone leaders have agreed to an economic bailout for Greece that keeps the debt-ridden nation in the 19-country common currency pact, but only if the Greek government implements a host of deeply unpopular austerity measures, including cuts to public pensions and sales tax increases. The total rescue effort could amount to 87 billion euros in emergency funding over the next three years including an immediate emergency 10 billion euro loan to help Greece keep its fragile banking system afloat and repay loans due this month.

The deal is virtually the same one that Greece’s leadership rejected in a dramatic national referendum two weeks ago. It requires the approval of several European parliaments this week, while Greek lawmakers must pass the austerity reforms demanded by Eurozone leaders by Wednesday or lose the chance for the financial bailout – its third since 2010.

Greece, a country of 11 million people, accounts for less than 3 percent of the economic output of the countries that make up the eurozone. But the possibility of a Greek exit could potentially be catastrophic to the creditor countries, as well as having an impact on broader ongoing problems in the eurozone.

UConn Today asked Fred Carstensen, professor of finance and economics in the School of Business, to help explain the crisis in Greece and the threat posed to the eurozone. Here is an edited transcript of that conversation.

Q What was Greece’s economy like before it entered the eurozone?

A Relative to other members, it was weaker, with lower per capita income, a less sophisticated economy, but self-sufficient in food, and with strong sectors in shipping and tourism. It also had its own currency and could resort to monetary policies that would generate a falling exchange rate, making its goods and services more competitive in European and global markets.

Q What were the consequences for Greece joining the eurozone?

A After adopting the euro in 2001, Greece enjoyed the (perhaps illusory) benefit of common prices with the rest of the countries in the eurozone. Avoiding the difficulty of converting currencies made Greek vacations and perhaps some goods more attractive. With Greek government bonds now denominated in euros, investors seemed to think that Greece’s debt bore little more risk than France or Germany, a fundamental mistake of which Greek governments took full advantage to borrow money.

But over time, membership in the euro meant widespread damage to Greek agriculture, as the country became increasingly dependent on cheaper (in euros) imported food. Other sectors were also weakened, as Greece became increasingly dependent on just two sectors: tourism and shipping.  Both sectors of course were extremely vulnerable to exactly the kind of financial collapse that began in 2007 from the American subprime debt and credit crisis. That collapse resulted in a dramatic shrinkage in both tourism and the demand for shipping.

That said, Greek debt was not particularly high relative to GDP by historical standards at the beginning of the crisis, but the narrow dependence on two sectors meant the Great Recession hit Greece particularly hard, so sovereign debt relative to GDP ballooned.

Q In the aftermath of the recent referendum in which Greek voters opposed European terms for a bailout, Greek banks were closed and were rapidly running out of cash. What would happen if money became no longer available?

A If the issues had not been resolved this weekend, then Greece would almost certainly begin issuing “script,” essentially i.o.u.’s as money, and would then have reintroduced their former currency, the drachma. Many banks would have collapsed, because many debts would be uncollectible. There would also have been extensive damage across the eurozone banking sector, which holds billions in Greek debt. Greece would probably declare bankruptcy and refuse any repayment; and it would have taken years to sort out the legal and financial mess.

Q What have been the effects of austerity measures on Greece to date?

A It’s important to understand that the austerity measures Greece has been living under for several years have deeply shrunk the economy, generated very high unemployment running to nearly 50 percent among younger workers, destroyed a significant share of household financial wealth, and left Greece with both heavier debt relative to its reduced GDP and virtually no resources to invest in its own economy. It’s a textbook example of how to mismanage a fiscal crisis. The Greek leaders have insisted on preserving some of their budget for these crucial investments. Without them, it’s hard to see how Greece can restore economic health while remaining within the eurozone.

Q What can we learn from Iceland’s experience (in which it decided not to pay the debts to Europe of its three major banks during the credit crisis, and had a credit crash, then an economic revival). Might that apply to Greece?

A What we learn is that if you don’t control your own currency, you are probably headed for a lot of hurt – exactly as has been unfolding in Greece. (Indeed, if we weren’t talking about Greece, we would be talking about Finland, which has suffered a terrible economic decline and, lacking a sovereign currency, has little ability to respond with the policies to which any introductory economic textbook or economic historian would point.) Iceland – with the cooperation of a lot of European countries – pursued some reckless business strategies, but it controlled its own destiny and took dramatic and painful steps to address those failings. Doing so permitted it to engineer a rapid, successful recovery.

Q So what would happen if Greece were to leave the eurozone?

A Chaos, at least in the short run. Businesses and financial institutions dislike nothing more than uncertainty – and a Greek exit would generate enormous uncertainty. We simply don’t know how extensive the web of financial obligations is, or how much risk is involved, or how long it could take to sort it out.

Q Would the U.S. feel any fallout from the situation in Greece and the eurozone?

A Fortunately, the U.S. economy is relatively isolated from any fallout. If Greece were to leave the eurozone, that could generate some nervousness in stock and bond markets, because a Greek exit would destabilize the eurozone for a period, and that would impact global trade. But the situation in Greece is probably less important to the U.S. than the emerging problems in the Chinese economy — now second largest in the world — and, frankly, far less important that America’s own failure to gets its own house in order.

Q In the longer term, how might the Greek debt crisis impact the Euro and the European Union?

A There is some possibility – only small I think – that the crisis will take the eurozone toward a much more sustainable federated framework, with a unified regulatory structure of financial markets and institutions, and begin addressing the fundamental need to create some coherent fiscal structure. But the crisis has driven a revival of nationalist feelings, which work strongly against increased unification. So there is some possibility of this leading to a weakening of the eurozone narrowly and of the European Union broadly. The bottom line is: stay tuned. How this plays out will have major implications in the long run for all of us.