The European Central Bank helped some by letting Spanish banks post government bonds as collateral for cheap three-year loans, providing some relief to the banks and leading to lower interest rates. But the central bank and its German paymasters have so far been unwilling to countenance a credit boom and higher inflation in Germany to juice economic growth in its neighbors.

Devaluation to strengthen Spain’s exports was, of course, out of the question. The only thing Spain could do was borrow to pay for unemployment insurance and other safety net programs that have exploded even as tax revenue shrank. When investors would lend it no more at bearable rates, it had to slash public spending, digging itself a bigger economic hole.

Image Credit... The New York Times

Germany’s leaders insist the solution for Spain and other sickly countries is to devalue “internally” to regain competitiveness, essentially, slashing wages to reduce labor costs. Yet it is unlikely that a democracy could sustain such an adjustment for long. Labor costs in Spain are still rising though almost one in four workers does not have a job. How deep would unemployment have to be for wages to start to fall?

Against the punishing austerity demanded by Germany, an exit from the euro — followed by a sharp devaluation — might not seem too bad a proposition.

This has been done before. In 2001 Argentina dropped the peso’s decade-long peg to the dollar, virtually wiping out the savings of Argentine citizens. Banks went belly-up. Real wages plummeted. Foreign investment dried up after the country defaulted on its foreign debt, and the government had to slash spending to live within its means. But though the Argentine economy contracted 11 percent in 2002, it bounced back sharply to experience a decade of rapid exports and stellar growth.

Despite its flaws, there is one powerful reason to stick to the euro that even some of the most skeptical economists accept: the prospect of breaking away from the euro is very scary. It’s difficult to forecast how such a dissolution would unfold. There is, in fact, no legal way to leave. And it would be searingly painful for many countries.