It is sad and surprising that among the deluge of comments and letters on Greece in the European papers in the last few weeks, not one has gotten the most crucial point about the crisis. Most commentators treat Greece's domestic problems and those of other southern members of the European Monetary Union (EMU) as if they were totally unrelated to external trade within and outside EMU. But even the few who mentioned the huge external imbalances inside EMU and their contribution to creating an unsustainable fiscal situation have not provided the basis for a proper judgment about misdoings and wrongdoers. The budget deficits may be a big problem but it is the external imbalance that could lead to dissolution of the EMU if strong corrective action is not taken soon. As long as important wrongdoers are able to hide behind the flawed mainstream theory of flexible labour markets, strong political action is not on the cards.

Greece's current account deficit already had reached nearly 15 per cent of GDP in 2007 and has come down slightly due to falling imports in the recession. What has gone wrong? Between 2000 and 2010, Greece's net exports were sluggish but domestic demand rose at a healthy 2.3 per cent according to EU Commission estimates. Real compensation to labour increased at 1.9 per cent per employee annually, a little less than productivity. Unit labour costs, the most important measure of international competitiveness between members of a currency union, advanced at a rate of 2.8 per cent per annum and reached a level of 130 in 2010 if 2000 is 100.

On the other hand, the biggest country in the Union, Germany, accumulated a huge current account surplus in the same period, culminating at 8 per cent in 2007. What has gone right? Between 2000 and 2010, Germany's net exports exploded but domestic demand stagnated with an insignificant annual increase of 0.2 per cent. Stagnant real compensation - at 0.4 per cent, its growth fell far behind productivity growth - explains the sluggish domestic demand since the expected employment creation did not follow from wage restraint. Unit labour costs in Germany rose only marginally in the decade, reaching a level of 105 in 2010.

This simply means that the production of a comparable good or service that was produced at the same cost in 2000 in all the member states of EMU and could be sold at the same price now costs 25 per cent more if it comes from Greece than if it is produced in Germany. The difference is similar for Spain, Portugal and Italy, 13 per cent for France and 23 per cent for Ireland. Now, some people like the President and the chief economist of the European Central Bank hold that the difference is not relevant as Germany had absolute disadvantages before the beginning of EMU, mainly due to the burden of the German unification. However, logic says otherwise. If your belt tightening only makes up for absolute disadvantages, you will not end up with absolute advantages. But this exactly is the German case. Germany is the only big country in Europe that was able to stabilize its global market share in the first decade of this century, whereas all the others lost dramatically.

That leads to the final line of German defense, namely that high unemployment has justified the German wage dumping and still does. Wrong again, unemployment in Germany has fallen but it is still as high as in other countries as the domestic demand gap compensated the external demand overhang. Moreover, countries seeking to repress wages for domestic reasons should not join currency unions if they are not able or willing to convince all the others to do the same. Even worse, Germany has agreed to enter a currency union with an inflation target of close to 2 per cent and not up to 2 per cent. Given this target and the high correlation between unit labour costs and inflation, it was a clear violation of the common EMU inflation target by the German government to put enormous pressure on wage negotiations, which resulted in a unit labour cost growth of close to zero.

Greek officials are wrong if they believe that there will be a Greek solution inside the EMU and out of the slump. If Germany continues with belt tightening, and there is every indication that it will, Greece would need to absolutely cut wages far beyond the public sector that is discussed now. The result will be deflation and depression for Europe as a whole but no Phoenix rising from the ashes as long as correction of the overvaluation by devaluation is impossible. But that's not only a Greek tragedy. If Europe cannot agree on a concerted action with explicit decisions about wage adjustment paths for many years, indeed for decades, to rebalance its trade, all of the so-called PIIGS countries mentioned above will have to consider opting out of the EMU. No country in the world can survive economically with all its companies facing huge absolute disadvantages against their most important trading partner.

* The writer is Director of the Division on Globalization and Development Strategies at UNCTAD, Geneva, and has been deputy finance minister of Germany at the start of EMU. (www.networkingideas.org)