Germany's economic and political generals are fighting the wrong war

All of these situations are worlds away from that facing the euro zone today. Japan's experience of the past twenty years demonstrates that it is actually very difficult to generate inflation by expanding the central bank's balance sheet, even when that is an explicit objective, in circumstances where potential supply exceeds aggregate demand by a wide margin. Nor have the US Federal Reserve's substantial purchases of US Government debt in recent years, in the aftermath of the deepest recession since the 1930s, resulted in higher inflation.

There is no want of potential supply in Europe. Unemployment is stuck at 10%. 20% of the euro zone's industrial capacity lies idle. The imposition of ever-more-stringent austerity measures on highly-indebted governments isn't working. On the contrary, it is pushing Europe back into recession, which is in turn making it harder to reduce budget deficits and reverse the upward trend in the level of public debt. And, as this month's 'silent coups d'etat' in Greece and Italy (in which democratically-elected governments have been replaced by unelected technocrats) suggest, it risks undermining the principles on which the European Union claims to be founded.

In any event, the role which the European Central Bank needs to be allowed to play in resolving the European sovereign debt crisis needn't amount to sustained financing of government deficits. It is perhaps better conceived of as being akin to central bank intervention in the currency markets.

When, in moments of one-sided speculation, or panic, foreign exchange markets push a currency to what by any reasonable yardstick appears to be extremely over- or under-valued levels, it's not unusual for central banks to sell or buy that currency in sufficient volume to push it back in the opposite direction. If the central bank concerned is perceived as 'credible', the volume of purchases or sales required to achieve its objective will often be quite small. And if its judgement as to what constitutes 'reasonable' is correct, it will usually end up making a profit.

Arguably, financial markets have, in their panic, pushed yields on Italian and Spanish bonds to levels that seem hard to justify, so long as those governments have credible plans to put their public finances on a sustainable footing. ECB intervention could reverse that panic.

Germany's economic and political generals are re-fighting the wrong wars. In so doing, they are risking the whole 'European project, and more besides.