Unemployment exceeds Great Depression levels in Spain, many parts of Greece, Portugal and Italy, and is rising in northern Europe. Slashing government spending and labor-market reforms have neither restored Club Med economies nor their governments to solvency.
Across much of Europe, gross domestic product is shrinking faster than governments can cut spending, and sovereign debt burdens are becoming worse, not better.
In the south, labor-market reforms can work only if they are decisive enough to change investors' perceptions and export opportunities abound to sell what new factories could make. Europe's entitlement culture makes swift reform politically impossible, and the Club Med states' economic troubles have spread to their natural export markets; the German and other northern European economies are contracting, too.
For Club Med governments, stimulus won't work either. They can't increase borrowing and spending fast enough to boost their economies without causing panic among bond investors and instigating a pan-European financial crisis.
What should keep German Chancellor Angela Merkel awake at night is that if southern Europe completely collapses, Germany and the other northern states, lacking southern markets for their exports, will be thrust into a permanent recession, too; all of Europe would be gripped by depression.
Then it's either draconian austerity and double-digit unemployment for Germany and other northern states, or investors will desert their bonds, too.
The European Central Bank would have to either preside over the demise of the euro or print enough money to finance governments and set off hyper-inflation. Europe would be gripped by double-digit inflation and unemployment.
What technocrats behind Merkel's extreme austerity prescriptions for southern Europe won't acknowledge is that a significant measure of German and northern Europe economic success is premised on exporting to the south and amassing trade surpluses.
Simple math requires the Mediterranean states to have corresponding trade deficits as long as the countries are locked inside the euro and can't devalue their currencies to escape. Those trade deficits must be financed by borrowing from the north--either by their governments spending and borrowing too much, as Rome and Athens did prior to their crises, or their banks financing real estate bubbles, as Madrid permitted prior to the global financial collapse.
Once that borrowing is constrained--as the austerity imposed by Germany in exchange for aid now requires--German and other northern economies lose their export markets and sink into recession. That is happening right now: GDP is contracting in Germany, France, Belgium, Luxembourg, Austria, and Finland.
The only option left is for Germany and the others to boost government spending and deficits to stimulate their economies, export less, and import more from the south--permit trade to balance between the north and south and get Europe on a more sustainable path. German politics make voluntarily abandoning mercantilism virtually impossible.
Prior to the euro, the European Union thrived without permanent high unemployment throughout the Mediterranean states. But now the single currency has locked in high labor costs in the south and made their recessions permanent.
A return to national currencies would permit Italy, Spain and the others to devalue to make their exports more attractive in Germany and other northern states, and rebalance trade and growth in ways the German politicians can't or won't.
Europe is slipping into a depression--unemployment and stagnation not seen since the 1930s. Nothing can save it other than abandoning extreme austerity, labor-market reforms too rapid for national politics to support, and a single currency that delivers economic decay and depravation to large portions of the continent.
When high unemployment in Europe brings voters to their senses, then abandoning the euro and realism about the prosperity and security governments can guarantee may bring Europe back. Nothing less will do.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.