I don't think the Greeks would like to have their currency badly weakened. Any imported goods will become much more expensive and their exports will earn them much less income. Everyone, the rich, the poor, the politicians, will be affected. Basically most of them will need to be more frugal, something they are protesting against.

Also, in 2010 their import is 44.9 billion dollars twice the amount they export, 21.1 billion. Even if their exports go up because of weaker currency, the pain from higher import prices will be much worse than the rises of income in the short run.

Your consequence number 1: trade barrier is an interesting possibility, but 2: the collapse of EU is unlikely to happen given that the Greek economy is only 3% of EU, and this strong measure will have threatened other troubled economies enough they will be much less likely to default and cause more issues. The measure might in fact prevent the collapse of EU at least in the short- to medium- term.

Weak currencies have worked great for countries like China. It creates a lot of employment for export. It's a way to trick people into working at lower salaries I guess, a way to lower minimum wage yet give people the impression that it goes up (inflation has a similar effect).

More jobs has a strong political effect too; people will probably tolerate more austerity if it's not combined with unemployment.

The article explains pretty well in my opinion why that 3% is very capable of collapsing the rest of the EU. If Greece defaults, investors lose their money. That's not too bad (although there could be a domino effect with banks), however investors will also start worrying more about a default of Ireland and Portugal, followed by Spain and Italy. Such worry translates to higher interest rates leading to the horror scenario of Spain needing a bailout (which noone can afford to give them).

Anything that amounts to Greece not repaying their debts, will be considered a default by the market, likely leading to what I described in the above paragraph.

Greece, for all its issues, is a much richer country than China w.r.t its population, you cannot compare those countries. For greece, devaluation would mean that imports would become much more expensive, a state almost unable to borrow any money, etc... It would be even worse than it is now. China does not need to borrow much money on foreign markets, and it is not democratic (the Chinese gvt would never tolerate the strikes in Greece, most likely would have sent the army).

Default is the only realistic option, but Germany and France refuse it for political reasons. The other reason is that a lot of Greek debt is owned by banks from those countries: selling banks bail-out in France or Germany is not that much more popular than in the US nowadays.

Germany is also doing well with a devalued currency. If Germany still had the Mark, instead of the Euro (which is being devalued by all these crisies) it would be higher than the Swiss Franc right now.

By which measure is Germany doing well ? Its gdp increase has been anemic for years, and is for example not significantly different from France, which is rarely given as an example of growth rate those days: http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_... (the numbers stop around 2009 unfortunately, but the effectively devaluation policy of Germany started with Schroeder coming in power long before the crisis).

What is true is that Germany has put in place a devaluation strategy (by reducing wages instead of devaluating its money), but this has been a catastrophy for Europe as a whole. "Real" gdp growth comes from increase of productivity: devaluation helps hiding this for some time, but not that long.

The unemployment level in Germany is the lowest it has been since Germany was unified. That is definitely a sign of doing something well.

It's only a good sign if the government is not a big employer (directly or indirectly though subsidies, trade barriers, etc). I don't know enough about the German economy to know if that's the case here.

To put in another way: the greatest punishment for the Greek people is to actually repay their debts. It means low wages and high taxes for decades.

Of course, the most mobile part of the population and most companies would emigrate under such circumstances.

Default (in some form) is a very attractive alternative, but the EU will keep coming up with better and better deals to prevent it.

Perhaps that should read more along the lines of "the most punishing." English isn't trivial.

That's probably what I meant. Or "the worst suffering", regardless of whether it is punishment.