As concern continues to grow about the deepening financial crisis in Europe, Germany's crucial role in the economy of the region is becoming more and more apparent.

It is not simply that Germany has the largest economy in Europe; it's that "the fate of Europe depends on Germany," writes financier George Soros in a column in the Financial Times this week.

While the economies of most European Union countries have been languishing since 2008, Germany's economy has been booming since the country managed to quickly emerge from the global financial crisis that hobbled many others.

However, that appears to be changing, according to the latest statistics. This week's economic indicators suggest the German economy is stalling: GDP in the last quarter went up just 0.1 per cent.

That backs up reports last week that industry sales had stagnated and foreign demand for German products was falling.

France's growth is also stalling, and on Aug. 16, German Chancellor Angela Merkel met in Paris with French President Nicolas Sarkozy to discuss the economic situation. The leaders of the two largest economies in Europe were trying to calm the markets, but their proposals for dealing with the debt crisis also served to highlight the importance of Germany.

Financial crisis spurs debt crisis

The 1992 deal that created a common European currency — the euro — and monetary system left control of finance, banking and fiscal policy in the hands of national governments.

That system worked well, helping generate significant economic growth for the 17 countries that use the euro as their currency, collectively known as the eurozone. (The EU has 27 member states in total.) Borrowing rates fell to German levels, as markets perceived a link between the strong Germany economy and other eurozone members.

Then the crisis hit. It turned out European banks — especially German ones — had bought into the sub-prime loan system in the U.S. in a big way.

The current issue of Vanity Fair magazine has a much-discussed feature on the German economy by financial writer Michael Lewis ("It's the Economy, Dummkopf!").

In it, Lewis explains that while every Wall Street firm had realized by the middle of 2007 that the sub-prime market was collapsing, German banks and investment firms kept buying.

"The last buyers in the entire world, several people on Wall Street have told me, were these willfully oblivious Germans," writes Lewis.

As in the U.S., the "too big to fail" banks and financial institutions in Europe also had to be propped up. In Germany, Commerzbank, one of just two giant private banks in the country, was the first to be rescued by the government.

It's the view of billionaire investor George Soros that 'the fate of Europe depends on Germany.' Soros participates in a conference in Cancun, Mexico, Dec. 8, 2010. Jorge Silva/ReutersSoros argues that the European bailout was the right move, but that soon after, Merkel made a statement that was "the origin of the euro crisis." Rather than stating that the financial institutions would be supported by the EU, she said the backstop would come from the EU states individually.

"[That] shattered the vision that the EU will protect the euro in a joint effort," said Soros in an interview this week with the German news magazine Der Spiegel.

Interest rates in the eurozone began to diverge, with Greece, Portugal, Ireland, Spain and Italy —the so-called PIIGS economies — experiencing the largest increases, and that eventually led to the debt crisis.

But in Germany, interest rates fell, making it cheaper for the country to finance its own debt. Despite German banks' deep involvement in the sub-prime crisis, "Germany appears to have experienced a financial crisis without economic consequences," writes Lewis, and this makes its role in resolving the current debt crisis crucial.

Germany again becoming a great power?

"In a crisis, the creditor always calls the shots," Soros told Der Spiegel.

To maintain the euro and the monetary union, Germany had to become the eurozone's creditor, a role it took on reluctantly.

"The euro is the foundation of our prosperity," Merkel told the media after her summit with Sarkozy.

The influential American strategic analysis group Stratfor recently examined the changes in Europe. It argued that Germany has been the chief beneficiary of the eurozone because it was an easy way to make, "Germany matter on a global stage without the sort of military revitalization that would have spawned panic across Europe and the former Soviet Union."

Stratfor's analysis concludes that, "Germany is on the verge of once again becoming a great power."

One of the piecemeal steps that the EU has taken to address the debt crisis is the creation of the European Financial Stability Facility, which takes its orders from Germany, its chief creditor, according to Stratfor.

Spain has the highest unemployment rate in the eurozone, and the dire economic situation has spurred protests across the country, such as this one in Barcelona on May 27. Juan Medina/Reuters

By this summer, it was clear that the EFSF would not be able to bail out all the distressed states in the eurozone. A huge debt consolidation took place, further extending German influence.

"In order to get the money, distressed states merely have to do whatever Germany — the manager of the fund — wants," Stratfor argues.

In Lewis's more poetic description, "the Greeks, and probably, eventually, every non-German … [in the eurozone must] magically and radically transform themselves into a people as efficient and productive as the Germans."

Pushing for more European integration

In addition to having the best credit rating in Europe, Germany also has a large trade surplus, adding to its importance and influence. Lewis mentions another factor that's not often discussed: the German central bank has a huge gold reserve of 3,400 tons.

All this would normally mean that as a safe haven during crisis, Germany would be experiencing a currency surge right now, which would have the negative impact of making it harder to sell goods for export because of the greater cost, but since Germany is part of the eurozone, that has not happened.

French President Nicolas Sarkozy, front left, and German Chancellor Angela Merkel, in blue, meet at the Elysee Palace in Paris on Aug. 16 to discuss the debt crisis. They called for a 'true European economic government.' Patrick Kovarik/ReutersBy contrast, Switzerland, which is not in the eurozone, has had to deal with a sharp appreciation on the value of its currency.

With the debt crisis now threatening to engulf France, Sarkozy and Merkel suggested what the next attempt at a solution would be, in Sarkozy's words, "true European economic government."

Of course, that is likely to further increase Germany's influence, with the heretofore reluctant Merkel now saying, "we need a strong integration of finance and economic policies in the eurozone."

Germany must choose

Merkel's challenge is to get the German people to agree to pick up the tab.

"The only economically plausible scenario is that Germans, with a bit of help from a rapidly shrinking population of solvent European countries, suck it up, work harder and pay for everyone else," Lewis writes.

If they don't, says Soros, the crisis will lead countries to abandon the euro and cause a banking crisis that "would push not only Germany, not only Europe, but also the whole world into conditions very reminiscent of the Great Depression in the 1930s."