According to my Brother In Law, a career Navy man stationed many years in germany, at least 50% of young germans deny the Holocast, and another quarter of the older population think it was perfectly justified.
So this aledged hyper sensitivity seems mostly oriented outward.
Well, I'll merely add my anecdotal evidence to that of your brother-in-law, without questioning his experience.
I also served in Germany. What impressed me, was the wide-spread (I did not meet enough people to claim it was universal) desire for PEACE. They welcomed me in their homes, knowing I was a member of the American Armed Forces. Their desire was for peace. They had "die Nase voll vom Krieg". They had more than enough war.
I worked with a LOT of Germans, and foreign-national labor units, in a depot. (K-town). These labor units were formed after the war from refugees of the Eastern countries. They would at times discuss their wartime experiences: there was no justification of war crimes. Going on recons for maintenance sites for exercises, the Germans were "universally" helpful. Several told me of their (positive) war-time experiences as American POWs. I never heard a kind word uttered about Hitler, or Nazis, or justifying the Holocaust, etc. . . .
Maybe I hung out with different Germans than your brother-in-law! ;)
Holocaust denial, revisionism, whatever, is basically illegal in Germany. This is not exactly healthy, from an intellectual point-of-view. There could be some resentment of the sheer PC-controlled nature of the issue. The absence of the ability to discuss the situation and its extent. (Personally, I don't get involved in the extent of it; whatever the extent, it was more than bad enough). In any case, I myself never met anyone who denied the Holocaust. I am quite sure the students are taught it all in school, and a German young man who posts here sometimes says the same.
My concern at the time (mid-80s), was not that the Germans were going to be militaristic again, but that the sheer war-weariness from the memory of war, and desire for peace, would mitigate against legitimate defense. Fortunately, Reagan was able to overcome that and get the missles fielded in Europe. That was no small undertaking, and we all should be grateful for Reagan's skill and determination.
Thanks for your input to the discussion.