"Austerity or stimulus" is a false dilemma. Illegitimate debts should be cancelled, not paid by the inflation tax. Austerity in the context of the sovereign debt crisis simply means using taxpayer dollars to pay off bankers who have conspired with politicians, instead of financing schools and roads. Nobody other than elite bankers wants this.
Europe could arrive at some standard of debt legitimacy, and selectively forgive all debts that don't meet that standard, while protecting legitimate mom and pop bondholders. The problem would then lie with insolvent banks who would undoubtedly hold their depositors and Europe hostage with threats of economic armageddon. But then the ECB could simply call their bluff and not bail them out, or, alternatively, bail out depositors directly and let the banks fail (or, as I would have done, let banks AND depositors fail). This would have been a better alternative if it was done in the US, as opposed to rewarding bank executives with massive bonuses, and keeping TBTF banks alive.
Unfortunately, the ECB, the Fed, and the IMF work for the banks, not the public, so to say this type of solution is unlikely to happen would be an understatement.
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