What should Rajoy do? He should do what Ambrose Evans-Pritchard at the Telegraph suggests (and what I have been suggesting), which is to form a solid Club Med bloc along with Portugal, Italy and France, and revolt against the deflationary policies of the ECB.
The Club Med bloc needs to go to war. They must unilaterally end austerity and finance their fiscal deficits in the domestic banking system using ECB money. What could the North do about it? Cut them off and precipitate a disorderly exit? As AEP says, “The Commission bends to power, and will not move unless the rest of EMU mobilises superior counter-power.” Faced with a breakup of the eurozone, Germany may relent and allow the ECB to grow the economy.
If not, the South should exit, default and redenominate, leaving Germany to pick up the pieces.