Dany Rodrik, not my preferred economist usually, has a very good paper on “Who Lost Europe?” in Project Syndicate.
“The traditional remedy for countries caught in the kind of crisis that Spain, Greece, Portugal, and Ireland find themselves in is to combine fiscal retrenchment with currency depreciation. The latter gives the economy a quick shot of competitiveness, improves the external balance, and reduces the output loss and unemployment that accompany fiscal cutbacks. But eurozone membership deprives these countries of this powerful tool, and depreciation of the euro itself is of limited benefit since so much of their trade (around 50%) is with Germany and other eurozone members.
Short of dropping out of the eurozone, the only real option available to Greece, Spain, and the others to boost competitiveness is to engineer a one-time across-the-board reduction in nominal wages and prices for utilities and services. This is a difficult task under the most favorable circumstances. The European Central Bank’s low inflation target (2%) renders it virtually impossible, as it implies requisite downward adjustment in wages and prices of 10% or more.”
Conclusion: Since Germany refuses to boost domestic demand and reduce its external surplus, and insists on conservative inflation targets for the ECB, it severely undercuts prospects for European prosperity and unity.
Rodrik sees no other solution than Germany changing its policy choices. But since they permanently differ from those of other eurozone members, I think it more realistic to suggest, and more likely to expect, a breakup of the euro. Each country would then be free again to follow its preferred policy and apply the traditional macroeconomic remedies to the common present predicament, due in large part (although not exclusively) to the euro itself.