As a thought-experiment, let’s imagine that Germany decides to permit (or is forced to permit) a monetary rescue of the eurozone, as opposed to a fiscal (eurobond) approach.
There is a rate of inflation (perhaps 8-10%?) that will allow the PIIGS’s to close their budget gaps, as nominal revenues race ahead of expense. So the PIIGS will be in surplus and their debt/GDP ratios will start to decline. Additionally, the euro will weaken in the foreign exchange markets, which will improve the current account positions of the PIIGS as well. That’s a pretty good start.
Let’s also say that the ECB stands ready to refinance the maturing debt of eurozone members based upon certain fiscal criteria and at various risk-adjusted interest rates (which are lower than current market rates). This will expand the ECB’s balance sheet, perhaps at the desired rate or perhaps above it. To the extent that the ECB’s asset growth exceeds the targeted rate of inflation, it can sterilize its purchases by selling “ECB bonds” to the public (just as the Fed can sterilize purchases of agency MBS by selling Treasuries). Investors replace their risky government bonds with “riskless” ECB bonds (riskless, because the ECB prints euros).
This would mean that not only would the PIIGS be in surplus with declining debt ratios, but also that they would no longer face refinancing risk. Crisis over. And not only would Germany not have to bail out anyone, it’s own creditworthiness would improve as well (at the expense of its credulous bondholders).