Kenneth Orchard signals to me this very interesting piece in the FT.com of Sunday by Gavin Davies. Kenneth made a perfect summary of it, which I quote:  “(Davies)argues that one can look at the Eurozone crisis as a balance of payments problem instead of a sovereign debt problem. In aggregate, the Eurozone periphery countries are running current account deficits around the same size as Germany’s current account surplus. As private sector flows from the core to periphery have dried-up, they have been replaced by official flows (bilateral loans, ECB financing, EFSF loans and the like). Correcting this imbalance is difficult with no exchange rate flexibility. The policies being enforced on the periphery countries — fiscal austerity, deleveraging and structural reforms — are deflationary. But the ability of periphery governments and economies to adjust through deflationary policies is highly uncertain. History has shown that wealthy, indebted democracies have limited tolerance for long periods of unemployment and declining real wages. Fiscal and monetary stimulus in the core would ease some of the pain, but this is not politically palatable in Germany.”

Read it, it is a great piece. Clear, sharp and precise view of the global macroeconomic scenario. It skips only two issues, to be mentioned.

First, if Germany must expand, it is not true that Italy and the Periphery of the euro area should stay put. The Periphery can expand public expenditure and boost aggregate demand and growth given that private sector demand there is stuck. How to finance such expenditure without  increasing their public debt imbalances? By reducing (by 2% of GDP in Italy) those transfers that are embedded in wasteful documented spending and/or by raising taxes (GDP would go up anyway since part of that taxed income, especially in this recession, is not spent so better to have the  government spend it all).

Second, if it were really true that Germany will not help, what will be the destiny of the euro area?  Well, the Center will keep the euro and Periphery will exit the euro to adopt either once more their  national currencies or create a euro2 with a large devaluation compared to the euro. Welcome back DM, hello again Lira. The best solution for a continent that has found out not be a Union.