New French President Francois Hollande is very much interested in changing Franco-German relations. The current economic policy being instituted to deal with the European crisis is based almost 100% on austerity. The leadership of German Chancellor Angela Merkel has been strong but I believe slightly misguided in that not enough has been done to boost confidence in growth. The biggest thing that is needed is the issuance of Euro Bonds to help fund peripheral European countries. Germany would in essence be subsidizing other countries with reduced interest costs, but Germany is incentivized to keep the EU whole, due to their reliance on the common currency allowing Germany to boast such a strong export driven economy.
The biggest problem impediment to the ECB being able to increase growth initiatives is that the ECB has no way of disciplining countries for not meeting the minimum budget requirements. There has to be a mechanism in place to keep things in order and Germany needs to make clear that if this condition is met, they are willing to help the peripheral countries obtain financing. Policymakers thus far in the EU and the United States have generally waited until the markets reach a point of maximum fear before really making moves that help resolve the problems. This is not constructive as confidence is essential for economies to function normally. All this saber rattling does is reduce growth further exasperating the problems. There isn’t a solution that involves keeping the EU whole that doesn’t involve Euro bonds and the time that elapses before they institute the bonds will determine the ultimate severity of the crisis.