Paul Krugman, on the PBS Newshour, basically predicts the break-up of the euro. In Spain the youth unemployment is 50 percent. Nominal wages are not falling fast enough, in euro terms, to produce equilibrium in the labor market. The only alternative to break-up, Krugman says, is for Germans to agree to moderate inflation, so that the relative price of Spanish wages can fall. But Krugman admits that isn't going to happen for reasons having to do with context, namely historical memory.
Context matters in experimental economics and no less in the real world (see, for example here and here and here). However, standard economics is generally taught as highly abstract theory, with no historical or cultural context. The prevailing view is that "economic incentives works the same everywhere…" Well, not exactly. Dani Rodrik's book, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth (2008) offers great insights into how context matters when constructing economic policy. This is important in understanding the policy options in Europe at the moment.
He adds: "[P]sychologically it is much better to take your pain all at once. You don't cut the cat's tail off an inch at a time." Ouch.
This is the escape route Argentina took a decade ago. For comparisons of Spain and Argentina's situations, see here. Debt repudiation is a nasty phrase: it is morally justifiable when the previous government was a military dictatorship and the debts were acquired in pursuit of crony capitalism. But debt repudiation under democracy is a much tougher sell. Bankruptcy law exists for good reasons, but any unraveling of the euro in Spain would be torturous.
We are inexorably moving down a path that nobody wants and everyone can see intellectually is flawed. Makes me understand how WWI got started when it was in no one's interest—and how in hindsight it all seems so obvious to avoid. Living through the midst of a potential catastrophe we seem paralyzed more by ideological terror (inflation, Keynesianism, markets) than real goblins.