In present recession, German banks are languishing under the burden of low profitability, high costs and poor corporate credit quality. While tax cuts, public spending and labor reforms could spur growth, the imperatives of the `growth and stability pact' of EMU do not allow implementation of some of these reforms. Lack of strong political will is the other stumbling block. While German banks do not have Japanese type problems of high NPAs, overexposure to sensitive sectors etc., they do need corrections through consolidation and reforms before the present problems turn into a crisis.

In Germany, economic growth was successfully propelled by social market economy for many years, but no longer, thanks to the radically transformed political priorities, in the wake of globalization, which demands capital market economy. Germany accounts for over one-third of Euroland's GDP and thus is an economic force to reckon with.

Why Germany has become the sick man of Europe? There are many reasons for it. Germany is no exception to the general problems of Europe as it has outdated labor laws and immigration policies besides ambiguous social welfare expenses resulting in high cost of production. While European Central Bank is obsessed with inflation targeting at 2%, under the `growth and stability pact', Germany faces the prospect of falling into a deflationary spiral, if not disinflation. While the solution lies in enhanced public spending to spur growth, its fiscal deficit, which is 3.7% of GDP (well above the mandated 3% level), does not permit this. In fact, Germany is forced to cut spending and raise taxes, surely not the best way to fight recession. There are certain structural problems as well for Germany. The unification of East and West Germany in 1990 resulted in huge costs for improving the infrastructure in the eastern part, which proved to be a drag on the GDP growth. The unified Germany has a higher unemployment problem, at least 10% higher than that of the Europe. It has higher real interest rates due to very low inflation.

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