Neil Irwin has a very short and sweet explanation of Europe’s continuing fiscal woes:
Europe really does have a big and plausibly unsolvable macroeconomic problem. Germany and a couple of other countries are operating in a radically different economic gear than Southern Europe, and the ways you might normally expect those imbalances to work themselves out are not available. In pre-euro Europe, currency swings would have handled the job. In the United States, continuing fiscal transfers from rich states to poor states do the work. Neither is a palatable option in a Europe that has a single currency and deep aversion among Germans, Finns and Dutch to sending their hard-earned euros to Greece and Spain and Italy.
Either Northern European governments will accept bigger fiscal transfers and higher inflation than their citizens want, or the Mediterranean nations with economic challenges will have to accept falling wages and high unemployment as they try to restore competitiveness, which their citizens very much do not want.
Germany is the most inflation-averse of the big Northern European countries, and Greece is suffering the worst unemployment among the Southern European countries. This is why Greece vs. Germany has become the main front in the ongoing economic trench warfare of North vs. South.
As for myself, I can’t bring myself to believe that the euro will break up. But I also find it hard to imagine that Greece can avoid open rebellion much longer if Germany continues to maintain policies that make economic balance nearly impossible. So I don’t know. What happens when an irresistible force meets an immovable object?