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From the FT's Lex blog

It's (un)official: the sovereign debt crisis is doing serious damage to the euro zone economy. Tellingly, the most damning bit of evidence comes from Germany. Preliminary data on Wednesday showed that the German economy probably shrank by 0.25 per cent in the final quarter of 2011 (though it grew by a quite robust 3 per cent throughout the year).

Greeks, Irish and Italians need no reminder that this year and next will be gruesome. The harsher fact is that not even a resilient Germany can offset a serious euro zone-wide recession this year.

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That is a sobering thought. But it ought to be a reminder that what happens in Germany still matters the most. For too long, investors' heads were turned by the glitzy but ultimately shallow economies of the euro zone's periphery, which easily outperformed the German model in the euro zone's early years.

With Ireland growing at around 8 per cent a year in those days, the distraction was understandable. Investors now know that it was also badly out of proportion. Germany, after all, accounts for 27 per cent of total euro zone gross domestic product. Even bubble-era Spain was never more than 11 per cent. It was only in about 2006 that Germany's economic growth began to overtake that of its euro zone peers. On current trends, it could be a while before that position is reversed.

The Bundesbank predicts that German GDP will expand by 0.6 per cent in 2012. That should keep other core economies ticking over. But it is a mark of the scale of problems in peripheral countries that they are starting to overtake the core once again - this time on the downward slope. The bloc's economy will shrink by between 0.5 and 1 per cent this year, most forecasts suggest, dragged down by a blizzard of austerity measures in some countries. If a systemically important bank were to collapse in 2012, or Greece were forced to admit defeat and quit the euro zone, that scenario could be worsened. Then, not even Germany's purring export machine could steer the euro zone out of recession's way.

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