Why Germany's Banks Are More Screwed Up Than America's

The green shoots keep coming in the US, but Continental Europe is still in a deep economic slump. I keep seeing forecasters changing their predictions of recovery from 2010 to 2011. One important reason for this is denial. The IMF expects that financial sector write-downs in Europe are going to be even bigger than in the US over the next year or so, in large part because of trouble in the German banking sector. Yet while both the US and UK governments are busy dealing with their broken financial systems, Europe still has its head in the sand.

I just edited a very interesting piece from our European economic correspondent Stefan Theil, which will appear in next week's international magazine, looking at Germany's banking mess, which is (incredibly) even bigger than America's. It's amazing that both Merkel and Germany finance minister Peter Steinbruck groan on about the moral failings of Anglo-American capitalism, when their own banks were in many cases more highly leveraged than Wall Street's, and doing a worse job at investing in all those risky assets, to boot.

As Theil writes, it's no wonder that politicians in Germany don't want to face the music – they are deeply implicated in the problems, as some of them sat on the boards of imploding banks, or set unrealistic profit targets for state owned banks in order to generate money to bolster bloated public budgets. Germany as a nation has done the right thing this week by setting a goal to balance its public budgets by 2016. But until it stops focusing on existential worries about capitalism, and starts cleaning up its own screwed up banking sector, recovery will be elusive.