Daniel Gros, the single most important man to listen to with regards to the European debt crisis..
And this is what he said:

“This policy of saving banks at the cost of breaking the back of entire countries is a disaster,” said Daniel Gros, director for the Center for European Policy Studies in Brussels. “Ireland is beyond fiscal plans as long as one cannot see the bottom of the losses in the banking sector,” he said. The only way to “stop the rot,” he added, “would be to let the Irish banks go under” and then use the European funds to “tide over the government until markets and the economy recover.”

When banks were rescued by taxpayer money, then reflated by letting them buy government debt while being funded at close to zero and supposedly make a killing on the differential, but then that same government debt started to misbehave and the banks troubles doubled.

All the while, silly austerity (20-30% wage cuts, etc.) is breaking a generation and breaking the economy, which leads to further downward spiralling of house prices and mortgage arrears, putting banks into yet more trouble, needing ever more tax money and ECB favours.

All this silliness can stop tomorrow if they let some banks go and shave off a considerable haircut from the sovereign and banking debts. There will be a tomorrow after that, but what policymakers are now trying is putting whole countries back to the middle ages.

And those haircuts are going to happen anyway. As soon as countries run a primary surplus (public expenditures minus tax receipts minus interest payments on sovereign debt) the incentive to restructure will become irresistible..

Each in their own way, those old reptiles, the European Union and the United States, are shooting themselves in the foot. It’s still not too late to reverse course, but if they don’t, the 21st century power balance will see a seismic shift that are normally only produced by big wars.