Here is a great paper by Kevin O'Rourke outlining the precise contours of Europe's mess. One key passage is this:
Rather than promoting pan-European growth strategies, the institutions of the Union have been enthusiastically promoting pro-cyclical fiscal adjustments in the periphery, even as they insist that heavily indebted governments repay private creditors of private banks in full. Not only is the policy incoherent, making sovereign default more likely on the one hand, while preaching austerity on the other; the insistence that taxpayers rather than investors pay for bank losses is also setting the stage for a potentially very damaging confrontation between core and periphery taxpayers.
This is a neat way of representing the political economy problem. But following on from this, O'Rourke claims that this
can be seen as proof of the primacy of politics, the problem being that it is national politics which are currently dominant, and that are making an effective common response impossible. If the nation state remains dominant within the Eurozone, then the trilemma suggests that there are two logical possibilities. Either public opinion is successfully ignored in countries like Germany, Greece and Ireland; or European Monetary Union will come under threat in the longer run. Something has got to give.
It's hard to see any other way this can end but with a fundamental restructuring of EMU. If not, the consequences will surely be even worse.