As it becomes clearer every day that Greece can not repay its debts, many obervers are missing the point about what this means for the rest of the Eurozone.
Far from Germany being the virtuous party in the Eurozone, they have committed some serious mistakes and may, in time end up becoming the largest victim of a Eurozone pile-up.
The fact is that while German industry has grown in efficiency and regained its position as an export power house, German banking remains weak, overprotected and distorted. Most people will know of the large German banks that operate internationally: Deutsche Bank or Commerzbank, these are after all large and generally successful institutions. However a significant proportion of bank assets are taken up by Federal or Land controlled banks such as KfW or Helaba, and within this sector (and indeed in the larger banks as well), there is significant pan-Euro exposure. Indeed outsiders estimate that the largest holder of Greek government debt is probably Germany.
Chancellor Merkel thus faces a deeply unpalatable choice: either to rescue and re-capitalize Greece, or rescue and re-capitalize the German banking system. It is here, more than any other, that we see that the banking crisis did not go away when the debts became the responsibility of the state. In fact the failure of Ms. Merkel to agree a single European market in finance has allowed German banks to avoid admitting the serious problems that they face. The result is that as in Spain, where similar semi-state institutions the Cajas exist, the para-state banks have fallen into a risk concentration trap that threatens their very survival.
As it becomes clear that the Greek government must insist on a significant haircut on their bond holders, there will be plenty of sleepless nights in Berlin in the coming weeks.