The problem is that German monetary policy and Mediterranean governance are not a match made in heaven.
We have seen this situation over and over in Latin America. Countries peg to the dollar and things start out great, but their policies don't match US policies, their economy loses competitiveness, and they have a financial crisis. Argentina was just an extreme case.
It was exceedingly dumb to not put an orderly exit process into the rules of the game when the Euro was created. It was exceedingly dumb for France and Germany to not accept penalties on themselves when they breached the deficit limits set by the stability and growth pact a few years ago. It was exceedingly dumb of investors and bankers to believe that Greece had become a little Germany and loan it so freakin' much money at German interest rate levels.
But above all, it's exceedingly astonishingly dumb to keep kicking this can down the road and putting the PIGS deeper and deeper into a hole.
Default and devaluation will be very ugly. As Tyler has pointed out, Argentina has not become an economic paradise. Yet it is the best chance for the PIGS to recover and start growing again given where we now stand. Even if they got a "good" bailout and some expansionary monetary policy from the ECB (LOL), the structural mismatch between monetary policy and governance would not go away.
Crappy governance requires crappy monetary policy. The theory is that adopting US or German monetary policy will force crappy governance to reform itself. However, we have seen time and time again that the reality is the opposite. Crappy governance will win out and crappy monetary policy will return.
Let's put the future behind us!