Anybody wanting to debate what Europe should do with specifically Greece and possibly Italy and Spain should look no further than the results from Iceland (default) and Ireland (austerity). Iceland just exited the IMF program as a success and though Ireland is muddling along it has at least returned to solid growth.
The Bond Vigilantes blog has a good post on the two options. Clearly the best path is to decisively pick an option and move forward. Both countries are moving forward while Greece continues to flounder.
The problem with Greece is that austerity plans and the lack of growth initiatives are killing the country. Less government spending leads to a smaller economy and in the end it makes no progress on the debt plans.
Have to agree with Jim that a quick haircut by the bondholders would've helped move the Greece situation forward a lot quicker. The market continues to fret over default or no default, but the real question is the size of the default. Honestly, most people have the concept that a default means a 100% loss when its more likely 20%.
Unfortunately though the PIGS don't have the option of currency debasement that helped Iceland out.
Now if the markets could just get the last I (Italy) off the fear list, than it might just rally and put this crisis behind us. Make this into a GPS issue or GPs where Spain is a small concern and the market would rally big time.