I agree with your description of the situation but on the other hand it can't be the solution for an economy to engage in currency wars.
Greek labour SHOULD be priced lower than labour in the Netherlands, Germany, Austria or the UK because it is less productive.
Once its labour is priced correctly it should cause foreign investors to invest there, which would in turn increase productivity.
I think austerity is not the issue, the problem is that the EU forces Greece to take on larger credits and even larger credits after that instead of letting dysfunctional parts of the Greek economy go bankrupt.
I agree; currency wars are certainly not the answer as they most likely make everyone poorer in the long-run. I'm more talking about a 'nation level' currency/floating exchange rate (to act as an automatic stabiliser) and interest rates that can be set domestically (as a stimulatory/destimulatory policy tool).
Those 'loans' to Greece are a 'kinda, sort of' weak form of HFE. Most bureaucratic government organisations have a strong instinct for self-preservation. I imagine they would have been pressuring Germany and other nations pretty hard to effectively extend these loans to Greece via capital reserve deposits and corresponding drawing rights for Greece.
I haven't looked at it in any detail, but I find myself wondering if there might be a half-way house resembling the Bretton-Woods system (though perhaps with something other than gold backing). Assuming the ECB is preceived to be credibly independent (as opposed to the IMF, who were suddenly less hawkish when the GFC hit rich western nations)...
EDIT: Oh and agreed on allowing capital and labour to reallocate. I guess the point of contention is at what rate, and whether there are other non-distortionary ways of softening the social dislocation (possibly necessitating fiscal support).
Greek labour SHOULD be priced lower than labour in the Netherlands, Germany, Austria or the UK because it is less productive.
Once its labour is priced correctly it should cause foreign investors to invest there, which would in turn increase productivity.
I think austerity is not the issue, the problem is that the EU forces Greece to take on larger credits and even larger credits after that instead of letting dysfunctional parts of the Greek economy go bankrupt.