Banks Are Pushing Germany to the Brink

Things Will Worsen for Germany

Isolation from the U.S. under the leadership of Chancellor Gerhard Schroeder is not going to help. U.S. fund managers have cut their exposure to German equities; the growing rift could lead to a boycott of German goods or increased tariffs. Said Mark Anderson, a technology newsletter publisher who keeps close tabs on both the Japanese and German economies because of their prominent role as buyers of U.S. software and hardware: "It looks like the first chapter of an economy in decline, not something near the end."

Germany's gross domestic product grew just 0.2% in 2002, its slowest rate in nine years. The government expects growth of 1% this year, a view widely considered overly optimistic. There's just too much debt to support the low level of economic activity. Whereas AAA-rated countries like the U.K. and the U.S. have kept public debt to around 38% to 45% of gross domestic product, Germany's debt is around 70% of GDP. (For comparison, AA+-rated Canada is at around 75%, Italy is at 100% and Japan is at a staggering 140%, says Puorro at Fitch.)

Where this ends is anyone's guess. Japan has not figured how to end its cycle of recession, anemic recovery and deflation more than a dozen years after its stock market began to collapse. Presumably, economic allies in the European Union will help Germany to wriggle out of its crisis a lot sooner. A couple of stocks in the following table should show the first signs of life, if and when a recovery comes.