The Euro might work on a very restricted basis in a few countries but it can never work in southern service economies.
It could work, but again, only with a single budget and without local national banks able to manipulate the currency in any way. For instance, there was a very good lesson from Yugoslavia in 1990 - Milosević 'persuaded' the National Bank of Yugoslavia to print $1.8bn to finance his election campaign when the economy was in a horrible state. It destroyed the 1990 version of the dinar completely, but it shows how local politicians can wreck a currency union.
I completely agree with you that the architects of the Euro got it wrong. They should have known from the very recent example of Yugoslavia (and if I remember rightly, the 1992-era ruble zone was also a good example) that a currency union can't work if local governments can dictate economy policies, and that an example of a successful currency union (the sterling area) relied on strong central governance from the Bank of England.
Of course, the problem in the southern countries is mentality and culture. Any economist looking at them in the mid 1990's should have refused to let them near the Euro until they could demonstrate their ability to manage their economies through good times and bad with a fixed exchange rate to the DM/later Euro. Italy had crashed out of the ERM in 1992, and others like Portugal or Spain had no real history of a fixed exchange rate to the DM. As I said before, a small, close-knit group in the beginning would have made sense, which would have allowed them to see the strengths and weaknesses of the Euro through at least one financial crisis and without the danger of reckless lending by banks to weak Eurozone countries. You only need to compare how the Baltic countries responded to their own crisis to see how the southern mentality differs, after all.
When you say "what now?", I think it's too late. We're going to see at least one country spectacularly exit the Euro, if not more. The currency itself won't fall, but I wouldn't be surprised if we end up with half the members that there are now.