It is superfluous at this point to rehash the usual news bits about the Euro crisis. Suffice to say that states have consistently borrowed too much in order to fund their social welfare benefits, and now they are running up against the limits of such borrowing.
Yes, the immediate crisis was brought on by a fall in tax revenue, from the recent and continuing depression. However, we must ask how healthy a fiscal system is that fails whenever everything stops going right, all the time. Governments have grown accustomed to mortgaging their futures (or more to the point, someone else's futures) in order to pay for their present. Sadly, the future is now.
How will this play out? Smarter people than I are puzzling through the intricacies of how bad the car crash will get; but in general, we are about to return to the era of recurring sovereign defaults. Whether through an outright repudiation of their debts, or through monetary debasement of the Euro which would fund "grants" to the debtor countries, the problem children of Europe are going to escape their obligations for now, at the cost of driving up borrowing costs in the future.
An interesting question that I haven't seen addressed elsewhere is: how will the bond investors be compensated for their loss? It is one thing when you are a Latin American country borrowing from overseas banks; you can expropriate from them without pity and even with glee. But when your major lenders are German and French banks, and you have to live with these people even after you default, there needs to be something in it for them.
In earlier eras, when a profligate government had to periodically default on its debts, it would do so by borrowing from its own banks, who would face the certain prospect of losing their money every decade or so. In exchange, they were given lucrative monopolies over domestic lending and money creation. (An example of this can be seen in Mexico under Porfirio Diaz and thereafter.) The deal was worth it to the banking elites, for whom the periodic defaults became just another cost of doing business.
So what concessions will the big European banks extract from their governments? Or will the governments simply nationalize the banks, as many are itching to do? And if they do, what happens next?