The European economy used to be very simple. The Germans manufactured excellent goods, exported them to its European partners and piled up annual trade surpluses of two and three hundred billion euros.

The German banks recycled this money into American and Spanish mortgages, Greek, Portuguese and Italian bonds and Irish banks, which meant those countries had the cash to continue buying German exports.

Then the financial crisis hit. The German banks lost some of their investments, particularly in the United States, panicked about the rest and stopped recycling the money.

Angela Merkel's German government then used its political muscle in Europe, and at the European Central Bank (ECB), to protect the German banks and their European investments. The debts had to be honored and the investments saved. Various rescue packages were cobbled together with bailout funds for Ireland, Greece and Portugal and another fund to recapitalize Spanish banks.

With support from the International Monetary Fund, the European Union financed these various support mechanisms. At the same time, since the stricken European countries still needed to buy German goods, the ECB in effect financed European trade and built up on the books a German credit of close to a trillion dollars under a system known as Target 2.

What Germany did not do was to recycle its trade surpluses. They have continued to accumulate, and Germany currently enjoys a larger trade surplus than China.

In a simpler world, the currencies of the poorer European countries would have devalued their currencies, making their exports cheaper and German imports too expensive to buy. The system would have come back into balance. But because the Europeans made the strategic political decision to preserve the euro at all costs, devaluation was not an option.

Logic then suggests that the Germans should find another way to recycle their surpluses into the stricken countries with useful investments in new plant and infrastructure. Wary of throwing good money after bad, the Germans have not done so.

But for many Germans this is a morality tale in which feckless Greeks and Spaniards lived high off the hog on borrowed German money. Worse still, they did not use the available time and investment to reform their labor markets, upgrade their technology and retrain their employees to become more competitive. The Germans also know that with one of the oldest populations and lowest birthrates in Europe, they need to take care of their savings to finance future pension costs. The country's unfunded pension liabilities are around three times its GDP (gross domestic product).

The U.S. Treasury, with support from the IMF (where the No. 2 two official, David Lipton, is a U.S. Treasury veteran), is critical of the German position, and has made the unusual public statement that: "Germany's anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment."

What that means in plain English is that the U.S. Treasury is accusing the Germans of exporting misery and forcing mass unemployment and impoverishment onto its European partners. There is some truth in this, but the Germans have also allowed the ECB to keep the partners alive by drip-feeding credit and offering to buy their bonds to keep them at least nominally solvent.

The hope now is that the tide has turned. The exports of Spain and Portugal are growing fast, productivity levels have jumped significantly and budget deficits are shrinking. But their levels of debt are mounting close to a sum so huge, already reached by Greece, no realistic prospect of growth could repay it.

Europe's businesses fear slow growth, so they are reluctant to invest. Consumers are strained so companies fear to raise prices and now deflation looms. As a result, last week the ECB lowered its basic interest rate to 0.25 percent, in what is starting to look like a European replay of Japan's lost decade.

There is one measure, probably not realistic, that would solve Europe's problems at one stroke. Germany could announce that henceforth its pensions would be payable only in Greece, Spain, Italy and Portugal.

The consequent shift of elderly Germans and their annual state pensions of some 300 billion euros would solve Southern Europe's financial problem, relaunch a property boom and create lots of jobs in health and personal care. With so many fewer old people to keep warm, Germany's energy bill would tumble. And within a generation, many young Southern Europeans would have become by necessity bilingual in German.

The bottom line is that German cannot continue forever taking money from the rest of Europe without sending something in return. If they won't send jobs or investment, they have few other options but to send people, preferably those like pensioners who are self-financing and who might enjoy retirement in the sun to winters in Westphalia.