Barry Eichengreen argues that the main problem in Europe is not the euro, but rather the failure to create a "proper emergency financing mechanism":
Europe’s Trojan Horse, by Barry Eichengreen, Commentary, Project Syndicate: Europe is now moving ineluctably toward a bailout for Greece. There will be emergency financing. There will be conditions. There will be the obligatory promises by the government in Athens. This will make it possible for the Greek government to service its debt. ... The longer-term consequences will not be savory, but they will be problems for another day. ...
All of this raises the obvious question: Was the real mistake creating the euro in the first place? Since I was one of the few Americans to advocate a single European currency, you would be justified in asking: Am I having second thoughts?
My answer is no, creating the euro was not a mistake, but it could still be a mistake in the making. The Greek crisis shows that Europe is still only halfway toward creating a viable monetary union. If it stays put, the next crisis will make this one look like a walk in the park.
Completing its monetary union requires Europe to create a proper emergency financing mechanism. Currently, other member states can provide assistance to Greece only ... in response to natural disasters or circumstances beyond a country’s control. This heightens uncertainty. ... If it is the Lisbon Treaty that creates these problems, then the Lisbon Treaty should be changed.
Moreover, assistance should come not just with conditions, but with temporary control of the national budget by a committee of “special masters” appointed by the European Union. Mere promises by the recipient, history tells us, are not enough.
No doubt, countries to which these measures are applied will express outrage. Well, no one is forcing them to take the money. Worried about moral hazard? Here’s your solution. ...
Europeans don’t do these things because they see themselves as Greeks and Germans first. They don’t interfere in the “sovereign prerogatives” of other member states. Germany is especially reluctant, given memories of its World War II conduct, not least in Greece.
Well, if Europe is serious about its monetary union, it will have to get over its past. It needs not just closer economic ties, but also closer political ties. Those running a strong emergency financing mechanism will have to be strongly accountable. They will have to answer to a strong European Parliament.
German Chancellor Angela Merkel’s constituents hate bailouts, because they know that it is they who will be doing the bailing. They oppose anything that smacks of European political integration.
But Germany is not innocent of responsibility for this crisis. It demanded an extraordinarily independent and unaccountable central bank that is now running an excessively tight monetary policy, aggravating the plight of ... Portugal, Ireland, Italy, Greece, and Spain... Germany’s enormous current-account surplus aggravates their problems further. Germany has also done too little in terms of fiscal stimulus...
Germany has benefited enormously from the creation of the euro. It should repay the favor. It should push for the creation of an emergency lending facility, and for political integration to make that feasible. It should provide more fiscal support. And who better to press for a more accountable European Central Bank?
The Greek crisis could be the Trojan horse that leads Europe toward deeper political integration. One can only hope.
Paul Krugman's point is that some of the countries, e.g. Spain, were not behaving in a manner that was fiscally irresponsible. It was the bursting of the housing bubble and the fall in revenues combined with the increase in spending necessary to fight the recession that put the countries into the red. Those countries need access to an emergency funding mechanism, but anything that appears to penalize them punitively -- and allowing outsiders control of the budget will be viewed in this way -- will be strongly resisted by countries who don't think they did anything wrong. This will require that countries like Greece, where there were fiscal problems due to bad government behavior, be treated differently than countries like Spain. But (just as with US states), some sort of bailout mechanism is needed in both situations.