Europe has failed to cure the contagion of debt rolling through its peripheral states of Portugal, Ireland, Greece and Spain. Ireland and Greece will almost certainly have to default on their mounting debt and leave the European Union. And deep recessions in those countries could stoke uprisings and political unrest.

That's the executive summary of my talk with Desmond Lachman at the American Enterprise Institute. Here is an edited transcript of our conversation:

What is Ireland's situation? Is it more like Greece, a case of rampant overspending and high deficits, or is it more like Spain, a case of an imploded housing market?

It's has characteristics of both. But it's not as bad as Greece. Ireland's got some of Greece's problems -- a huge budget deficit and high public debt level. But Ireland's big problem is that, like Spain, have a huge property boom that turned to a bust. The banks faced a run. And the government guaranteed bank liabilities up to 200 percent of the country's GDP. That's where their problem is right now.  Today, it was reported that European Central Bank [ECB] loaned $130 billion euros to Ireland, indicating that the banks are still having funding problems.

The government backstopped the banks, and now the European Central Bank has to back up the Irish government?

Yes. And in the end, S&P is estimating out that the bank bailout could cost Ireland taxpayers $80 billion a year, which might be more than a third of GDP.

Who's next?

It's Portugal. Just look at the spreads. Greece is the highest. Then Ireland. Then Portugal. Then Spain. All of these spreads are wider now than in May before the announcement of the safety net. That's showing you that the markets see this as a solvency problem [ie they're fundamentally broke], even as the ECB is dealing with this as a liquidity problem [ie they'll be OK with some cash transfusions].

You're saying the European Central Bank has failed?

I'm saying they're not solving the problem. They're only delaying the inevitable. If you didn't have the ECB backstopping Ireland and Greece today, these countries would have had to default already.

What are the safer countries like France and Germany afraid of right now: that monetary easing will lead to inflation or that bailing out these governments will cost them higher taxes?

Both. They don't want their money to go to Greeks retiring at 53 while they retire in their mid-60s. They're also worried about weakening the Euro.

But hasn't a weak Euro been beneficial to the Germans? They are a export country and a cheaper currency makes their exports more attractive.

There's no question that's the short term benefits that they've got out of it. The long-term cost is that the peripheral countries [Portugal, Ireland, Greece, Spain] could take down their banking system. The periphery is broke. The German and French banks have loaned them a boatload of money. If the debt of the periphery has to be written down, that's a huge hit to the European banking system. The periphery has to adjust downward, but it's stuck with a fixed exchange rate, the Euro. So instead of devaluing the currency, they have to promote deep recessions to bring down prices and wages. Lower tax revenue will hurt their debt again, which will require more spending cuts.

Do you think they could default, or restructure, on the Euro, or do you think the move to another currency outside the Euro is inevitable?

The EU was supposed to be about stability. Countries weren't supposed to have deficits more than 3 percent of GDP. Greece's budget deficit is 15 percent in 2009. So the budget isn't healthy, and they're having to tighten more. That'll lead to political instability. There's no way this thing ends well.

Here's the real problem with restructuring on the Euro. Take Greece. It has a budget deficit of 15 percent of GDP. Interest on the debt is 6 percent of GDP. Even if you write that down by half over night, you've still a deficit of 12 percent of GDP. They're going to have high unemployment for a long time. In Spain it's nearly 20 percent, and we're only just beginning. I don't know how long these countries politically can withstand it. In European history, when you stress the system, the politics goes haywire.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.