First, my definition of the problem: the common currency without (truly) common fiscal, monetary, political, and cultural systems means everyone is effectively borrowing in a foreign currency.
Now, two suggested solutions:
- Form a true union like the U.S. (although, not necessarily that structure, but you know what I mean).
This is the obvious answer that solves many of the issues that were pointed out even at the inception of the EU and Euro. Unfortunately it's very unlikely to occur, as the EU members are unlikely to give up their sovereignty.
- Germany leaves the Euro. This is the less obvious answer. Germany, more than others, can bear the transitional pains of a currency shock (appreciation in their case) and banking losses on loans denominated in Euros. The scenario of Greece leaving would be calamitous not only for Greece (currency depreciation in their case... assuming anyone would accept Drachmas), but also for a host of weaker-than-Germany nations that have lent to them.
Update: so it turns out Ambrose Evans-Pritchard already thought of my "less obvious answer" like two years ago. Goes to show you that anything and everything you can imagine is already on the internet.
This is the only break-up scenario that makes much sense. A German exit would allow Club Med to uphold contracts in euros and devalue with least havoc to internal debt markets. The German bloc would enjoy a windfall gain. The D-Mark II would be stronger. Borrowing costs would fall. The North-South gap in competitiveness could be bridged with less disruption for both sides.