JOHN MCMANUS recently described the problem facing Germany in the Irish Times:

If the US treasury lends to the US government it has reason to believe the government will do its best to pay it back, as both entities pursue a common goal of a peaceful and prosperous US. If the ECB lends to euro area sovereigns or some proxy such as the European Financial Stability Facility, it has no such assurance. The events of the last week in Greece and Italy would only make you more convinced that domestic imperatives will trump the obligation to repay the ECB in some countries, leaving the better-off countries to cover their liabilities. For better-off countries, read German taxpayers. The deployment of the ECB balance sheet without some sort of credible fiscal union and governance infrastructure to make sure such does not happen would be an act of folly.

This is why Germany and the ECB may be forced to play a game of chicken with countries like Italy.

There is one aspect of the crisis, however, about which Mr McManus and Michael Pettis, the author of another recent piece on Germany, make some claims worthy of dicussion: Germany's gain from the European project and the euro. (To simplify, the European project will be equated with the single market, or better: free trade. The Euro refers to the monetary union.)

Germany has benefited from free trade in Europe, no doubt about that. But why is this limited to Germany? Probably it is tempting to assume that a net exporting country like Germany is benefiting most from trade. But economically, that is by no means certain. Much more likely is that all participants benefit from the single market and that current account imbalances within a currency union can have ambiguous implications to say the least.

Which brings us to Mr Pettis' claim that Germany has benefited tremendously from the Euro. He writes:

These [current account imbalances within the euro zone] created employment growth in the countries that suppressed consumption, and forced the countries that didn't to choose between debt and unemployment. Of course since the latter countries had no control over monetary policy, the choice was largely made for them by the ECB with its excessively low interest rates, and their debt levels surged.

This is not very convincing, especially his claim that the periphery basically had the choice between “unemployment and debt”. There was a third, sensible choice: prevent hot money inflows into unproductive sectors like real estate and government consumption by balancing the budget over a sensible business cycle (taking into account the large cycles in currency unions, and booms in unproductive sectors), and through aggressive macro-prudential regulation.

And what about Germany's alleged gains from the euro? A fitting theory, common among German economists, reaches the exact opposite conclusion. Germany lost the advantage of low interest rates after the introduction and in part because of the euro. This led capital to pour into the countries of the periphery, while investment stagnated in Germany or even declined, leading to low growth, low inflation and persistently high unemployment. What Mr Pettis calls “excessively low interest rates” were actually too high for Germany in this monetary union.

This created the swing in Germany's current account from deficit prior to 2000 into surplus territory that Mr Pettis observes. Since the only way to adjust in a currency union is internal adjustment in wages and prices, Germany painfully devalued.

It is therefore rather odd to claim that Germany has benefited inordinately from the euro. The only upside for Germany was that it had to go through this painful adjustment while world demand was strong. The periphery has to go through a similar and in some cases much harder uphill battle in a time when aggregate demand is low in much of the developed world. This is a problem. The failure of the ECB to support European aggregate demand appropriately to facilitate this adjustment, and create higher inflation in Germany while doing so, is the single most underappreciated aspect of this crisis. Let's hope the euro zone survives long enough for the ECB to remedy it.