As the weather begins to cool, the European crisis is hotting up. Pressure is mounting on the German establishment to decide what they want for the future. Are they prepared to bend to make the euro work at least tolerably well? Or are they determined to stick to their guns – even if this puts the euro at serious risk?

The remarkable thing about recent developments in the eurozone is that, for once, the peripheral countries – Spain, Italy, Greece, Portugal and Ireland – are not in the frontline. Don’t get me wrong. Things in all these countries remain utterly dire. The current unemployment rates are frankly disgraceful. But some of these economies have begun some sort of recovery (although notably not Italy).

Spain is the most striking example. Over the past four years, Spanish exports have increased by more than 20pc and the economy grew by 0.6pc in Q2. Most impressively, Spain has moved from a current account deficit of 10pc of GDP in 2007 to a surplus last year of 0.8pc.

Things are not so “good” in the core countries of Germany and France. Germany’s economy has stalled, registering a small contraction in Q2. Meanwhile, in France, things are desperate. The economy has now stagnated for two successive quarters and the public finances are in poor shape. The government seems paralysed. France needs two things: to sort out its public finances and to reinvigorate its private sector with lower taxes, less labour protection and a reduced role for the state.

This would be difficult for any government but for a socialist president famed for indecision and who came to office pledging to oppose austerity, defend France’s social model and protect the French from the ravages of capitalism, they are nigh on impossible. M Hollande’s response has been to sack a leading minister and rejig the cabinet. This is rather like changing the first mate on the Titanic. France is heading for a monumental crisis that has been building up for years. Far from being protected from the ravages of capitalism, the French need to be brought to embrace them. Bonne chance! Mind you, as an inveterate Keynesian, I share the critics’ views about fiscal contraction. Yes, France needs to reduce its public deficit, but not by increased taxes and not yet.

It, like the rest of the eurozone, needs economic growth. That alone will bring some reduction in the deficit and when it is secured, policy can switch over to further deficit reduction.

David Fuller's view

The EU’s bureaucrats remained focussed on their gradual push towards federalism.  However, they may never achieve this goal, for better or worse, if the member states are unable to avoid deflation, lower unemployment and generate GDP growth.  That will not be easy in this post credit crisis environment, where economic recovery is now further impeded by the necessary sanctions against Russia. 

An optimist might conclude that these sobering events could inspire better governance by Europe’s national leaders.  Angela Merkel is now leading the EU’s sanction increases against Russia.  She knows that this will have medium-term economic costs but she could also push for more stimulative measures for Germany’s economy, which would also assist EU growth.  Germany needs to lead.  However, if Germany turns inwards, a break-up of the EU will become more likely.