In the wake of the bund auction failure, there is woe.

The problem is, no one believes the PIIGS will keep their promises.   They’ve broken too many already.  The new “stability pact” is a joke — oh, they’re suddenly going to start abiding by debt/deficit rules because… ?

Meanwhile, the Krug-eynesians keep insisting the PIIGS shouldn’t have to undergo austerity at all, which only exacerbates the concerns of the markets.  Their notions of ECB guarantees and eurobonds are the equivalent of throwing open the henhouse doors in exchange for a promise from the foxes not to eat too many hens — they will further reduce the already too-weak incentives for the Euro polities to curb the welfare state excesses that brought on this crisis.  That can only delay the inevitable, and at the cost of making the problem even worse.

There are now only two possible end-state solutions: a massive concession of sovereignty by the euro countries, or the end of the euro.  The first is even less thinkable than the second, and might result in revolution anyway — the Germans are not going to hand over their own fiscal sovereignty in response to a problem created by the irresponsibility of the PIIGS, and the Greeks, Italians, etc, are not going to accept de facto rule from Berlin.  The second will happen when it becomes clear the first cannot.

UPDATE:  Some good thoughts here.  Would the Fed really hitch our already-rickety fiscal wagon to the disaster unfolding in Euroland?  A frightening thought.