LONDON BRIEFING/Chris Johns: Latest trade data for the UK show an alarming fall in exports. This is not due to any sudden deterioration in British competitiveness but is mostly about slowing demand in some of the UK's major trading partners.

While global financial markets are naturally obsessed with every twitch of the US economy - which undoubtedly had a weak finish to 2002 - potentially much more significant developments are taking place in Germany. It wouldn't be too much of an exaggeration to say that Europe's largest economy is imploding.

All of a sudden it has become fashionable to compare Germany with Japan. In Japan, deflation has taken hold and the economy is actually shrinking. Zero interest rates and huge budget deficits are doing nothing to stimulate the economy. All of this has been building for the last decade and most economists now agree that the only solution to Japan's problems is for the central bank to literally print money and to close or merge most of the banks.

The role of the Japanese government should be to allow so-called zombie companies to go bankrupt and close. Until all this happens, Japan's financial system and economy will essentially remain in gridlock.

Could Germany be as bad as this? There are, on the face of it, several similarities. Structural rigidities in labour and product markets, rapidly ageing populations, wholly inappropriate monetary and fiscal policies and a political system with huge vested interests in maintaining the status quo are all common to both Germany and Japan.

Both economies remain too attached to old-fashioned manufacturing, something now best done outside developed economies. In the critical area of the financial system, Germany has many weaknesses but it is fair to say that the problems are not as deep rooted as they are in Japan. And that is mainly because Germany has not had to deal with the consequences of a Japanese-style property bubble. Many of Japan's banks are in trouble because of the bad loans they made over 10 years ago to the property-related sectors of the economy.

Japan has essentially gone from being an economy whose normal rate of growth (in real terms) used to be about 3 per cent to one that is now negative. The normal state of affairs in Japan is for the economy to contract.

Germany, 10 years ago, had a "trend" growth rate of around 2½ per cent. It is probably now 1 per cent and still falling.

Germany could end up like Japan, it is certainly heading in that direction, but it is not yet a certainty.

Everything now depends on what the authorities choose to do about all of this, if anything. If they continue to do nothing it could well be that Germany becomes an economy that goes "ex-growth".

For those of us who grew up listening to UK (and US) commentators exhorting us to be more like the Germans and Japanese, in economic terms at least, all of this comes tinged with hints of irony. But we should not indulge our more atavistic instincts too much. Germany's economic crisis is simply too serious and will have negative consequences for all of us.

Markets are beginning to wake up to all of this. Not unexpectedly perhaps, many people in the US and UK are beginning to wonder whether there could be pressures building that could ultimately threaten the euro. Just as these questions are being asked, the euro is strengthening against the dollar, causing Germany's economic problems to worsen. What is going on?

The euro is not under any kind of threat from Germany's malaise. Anybody who thinks that has learned nothing from the last couple of decades. The people who think the euro could break up are the same ones who thought the French franc would devalue in the great currency crises of the early 1990s. Sensible market commentators realise that we must be approaching an endgame, similar to the one that resolved those currency crises of a decade ago. The French will see to it that Germany does not become a problem for the European project.

Several things might happen. Germany might begin to reform its sclerotic economy and/or the European Central Bank could play its part and slash interest rates further. Both developments are likely. And both will occur as a result of French pressure.

Unlike Japan, where the rest of the world was able to watch with more-or-less academic interest, there are too many non-German interests that are vested in Germany growing again. Something will be done to ensure it. And what will emerge on the other side will be a much strengthened Franco-German alliance. Exactly what Tony Blair wants to avoid.

Chris Johns is chief strategist at ABN AMRO Securities, London. All opinions expressed are entirely personal.