That flag is the Basque ensign, it is similar to the Union Jack.
When the battle was lost, the other band, the national army, find themselves executing catholic priests that had been captured alongside basque soldiers and even the head of the church in Spain protested, threating General Franco with excommunication.
At about 16:30 on Monday, 26 April 1937, warplanes of the German Condor Legion, commanded by Colonel Wolfram von Richthofen, bombed Guernica for about two hours. Germany, at this time led by Hitler, had lent material support to the Nationalists and were using the war as an opportunity to test out new weapons and tactics. Later, intense aerial bombardment became a crucial preliminary step in the Blitzkrieg tactic.
In his journal for 30 April 1937, von Richthofen wrote:
When the first Junker squadron arrived, there was smoke already everywhere (from the VB [VB/88] which had attacked with 3 aircraft); nobody would identify the targets of roads, bridge, and suburb, and so they just dropped everything right into the center. The 250s toppled a number of houses and destroyed the water mains.
It would appear to be the case that some others would disagree with your thesis that "Germany" was not involved.
No matter where you go, there you are...
There are some pictures of these German pilots/crews that were shut down in Biscay. All of them dressed in their 3rd Reich Luftwaffe uniforms with 3rd Reich documentation on them. Some of them appear in pictures crying because they probably thought they were going to be executed right there. Well, hell no, good guys don't that. They were exchanged for Basque prisoners and repatriated to Germany.
Denying Legion Condor and 3rd Reich involvement in the Spanish Civil War or Guernica raid, it is something that has no sense at all.