It has by now become abundantly clear that Merkel's crisis management plan for Europe has not alleviated the debt crisis at all. Most of the economies in the Euro zone are now in worse shape, and the debt problem is definitely in much worse shape than 3 years ago when her strategy was first implemented, notwithstanding the huge amount of resources already spent or committed to alleviate the crisis. Merkel has stubbornly refused to stand with the rest of Europe to help fuel economic growth and to reduce the debt servicing cost through the issuance of Eurobonds, jointly underwritten by all members of the Euro zone.
At the same time, the austerity measures that she advised have become more and more severe, while a number of countries such as Spain and Greece are seeing youth unemployment shooting up to 50%, which virtually translates to a generation of lost hope, lost human capital, and lost hearts. Merkel's policy has led to humanitarian disasters, with loss of lives, children given up to charitable organizations, and sharp increases in suicides.
It is abundantly clear that with the economies shrinking and debt servicing costs rising - a result of growing nervousness and perceived risks, there is no way the countries asked to restructure their economies could manage. The debt-to-GDP ratio can only rise, as gigantic interest payments snowball and add to the already huge debt load. Stock price declines erode confidence further, and lead to further spending cuts and unemployment.
The headlines these days suggest the European leaders are planning for an "orderly Greek exit." But certainly a Greek exit cannot be orderly as is wished. Amazing how some European leaders satisfy themselves with wishful thinking. A Greek exit would mean massive defaults, as a dramatically devalued Drachma make debt servicing impossible. All the creditors that currently hold Greek sovereign debt will have to face massive write-offs. The contagion will definitely spread, as banks are perceived to have suffered huge losses through direct write-offs and indirect fallouts from the defaults. It will take a miracle for the euro to survive.
If Merkel insists on her ways, the best strategy for Europe is for Germany to exit the Euro zone. The rest of the members of the Euro zone will stand together and back up the bonds issued by members - provided that they are fiscally responsible. Fiscal responsibility here means containing their primary deficits and containing their spending. The key is no more fiscal contraction, and recapitalization of banks so they can function and extend credit. All government spending increases will have to be approved, and all debt issues have to be approved based on clearly defined criteria of fiscal responsibility.
The euro can then safely devalue, which will allow a chance for the countries currently uncompetitive to regain some competitiveness. The devaluation of the euro, leaving out Germany to revive its proud Deutschemark, will not increase debt servicing costs for the heavily indebted countries.
The euro can then survive, and growth will then have a chance to come back, and all can call an end to this folly.