At the midnight hour, when financial-market wise guys were predicting disaster, Europe’s political leaders proved to be stronger and braver than America’s. The big nations of the EU worked out a deal to resolve their financial crisis that does what US politicians, including the president, lack the nerve to pursue. The Europeans are whacking the bankers big-time.

Yes, the sovereign governments of Europe have to put up more billions to rescue debt-soaked smaller nations like Greece. But the bankers who lent all that money will be compelled to share in the pain—a 50 percent write-down on the sovereign-nation bonds they are holding. Ouch.

This may be the beginning of wisdom—forgiving debts that in any case will never be repaid. That giant step should give Europe a clean start for economic recovery. It’s a much smarter alternative than imposing perpetual austerity on people who are already broke.

American politicians are not there yet, not even close. Republicans are manning the barricades to defend the bankers on everything, even the most modest reform measures. The Obama administration is tinkering around the edges with small-bore adjustments that won’t accomplish much.

Rhetoric notwithstanding, Obama is still shielding the largest banks—the Wall Street Six—from the consequences of their own recklessness. The biggest US banks are still holding a lot of debt paper, especially mortgage-backed securities, that has effectively failed but is still booked as okay assets. Federal regulators could pull the plug on these illusions and force an honest accounting but are afraid to hurt big guys who are already fragile. Until debt reduction is undertaken in a major way, especially for home mortgages, American recovery is going to be an on-and-off-again affair. (See my article, “It’s Time for Debt Forgiveness, American-Style,” in this week’s issue of The Nation.)

The European crisis differs from the US version in this respect: the EU debt is held by national governments while America’s failing debtors are largely private citizens—especially homeowners stuck with “underwater” mortgages they cannot pay. Obama announced a small but helpful step this week—the administration will loosen some rules and make it easier for those he calls “responsible homeowners” to refinance their mortgages at a lower interest rate. The president also is relaxing the repayment rules on college loans.

By White House estimates, the mortgage refinancing might help as many as one million families. But that’s out of the 11 million sliding toward failure and foreclosure. A good thing to do, surely, but not an answer to the bleeding economy.

As the European crisis plays out, it will be a good test pattern for American politicians to watch. If the principle of debt reduction is as important as some experts believe, the bold action in Europe should clear the way for Europe’s economic recovery. Right now, some Wall Street cheerleaders are blaming Europe for our problems. If Europe gets well and the United States remains stagnant, the apologists will have to invent a new excuse.