The simple fact is that states that have large differences in productivity / accumulated infrastructure / endowments must either
1 - have floating currencies;
2 - use government purchases to sterilize the currencies ala china;
3 - support permanent financial flows from the more to the less productive states
Since the currency union effectively forbids #1 and #2, the only solutions left are #3 or the end of the currency union.
This is more-or-less identical to the continued subsidization of the south -- direct fed to state government transfers, eitc, medicare and medicaid, welfare, the military (which is, for many soldiers, essentially a work program), etc -- in the united states by the more productive coastal and northern states.
You may also be unaware that Greece has largely never been bailed out: of the so-called bailout so far, more than half the cash went to shaky German and other foreign banks [1].
[1] http://www.bloombergview.com/articles/2012-05-23/merkel-shou...
What happens if they don't?
Greece has perennially been an underachiever and on top of that wants to live like the rest of europe. One of the biggest issues is tax corruption. They just don't get the tax revenue they need in order to support the lifestyle (retirement, social services, etc) they desire.
People with means had an easy time evading taxes --for some income brackets it was practically voluntary. That's not viable.
Bailing Greece out would be throwing good money after bad. At some point you have to realize there are better places to invest your money.
This explains why today, after the financial crisis of 2007/08, it happens to be Greece in this miserable situation. Greece was the weakest link of Euro countries.
However, imagine a world in which there is a precedent for a Euro exit, and another recession hits. Big funds that have money tied in government bonds will want to exit bonds of weaker countries out of fear that the Greek story repeats.
This then creates the same self-fulfilling vicious cycle that hit Greece: as creditors move elsewhere, interest rates for the weakest countries increase, which worsens those countries' fiscal position, which makes more creditors leave, etc.
In such a situation, it is easy for the weakest link to be pushed over the brink.
Bailing Greece out would be trowing good money after bad.
Keep in mind that Greece isn't actually asking for more money for Greece. The Greek government was running a primary surplus for some time, and is perhaps even running one today, or at least close to it. The only reason for the Greek government to be in deficit is the interest payment, which means that all money that is being "thrown at Greece" actually ends up abroad in creditor countries!
Suggesting that Greece as a whole is single-handedly responsible for this mess is silly. Yes, of course their governments over the past decade and a half were incompetent and corrupt, but it was because of the cheap loans that they could cover up the problems and keep up the appearance to the voters that all was fine. Without that, they'd have been voted out of office that much sooner. Instead, the easy money left the bad situation to fester for far too long.
In the end, I think Greece will blink, they'll try to work something out, but pretend they had the best of the EU negotiators. My gut feeling is that if it came down to it, Germany would let them leave the EU. I think psychologically they have written them down and if a deal happens, well, the better.
On the other hand, if you let Greece leave the euro, it signals the others that Germany (and France) are serious and they had better not fool around.
A Greece with a weak currency does not impact the euro zone economy in any great way. Yannis probably thinks Germany would blink but at this point Germany has likely written them down already.