"Turning to the ECB, it has relatively few options that will provide meaningful support to a dismal outlook in Europe. The Wall Street Journal naively suggests that the Germans, French and stronger European countries will withdraw from the European currency union and create their own "strong euro."Looking at the original photo ops with former French President Sarkozy and Chancellor Merkel, it was evident to us from the start that the fundamental interests of France and Germany could never align. Now, with a new French President with his own limitations and political agenda, the situation is worse than before. At least former President Sarkozy and Chancellor Merkel had a cordial relationship; President Hollande, despite his having been trained at the Ėcole nationale d'administration, seems determined to establish a prickly relationship with Chancellor Merkel.
This is extremely unrealistic and would not solve the fundamental problem of economic imbalances within the European Union. Germany is really in the driver's seat, but it too will be reluctant to detonate the charge that destroys the empire of the Brussels bureaucrats, of which many senior ones are French. A slow, economically inefficient unwinding is probably what's in store."
President Hollande's attempt to be a broker between Germany and the European periphery is a recognition that the French hand is weak. It is yet another path to painting German Chancellor Merkel as the reason for rioting in the streets in Greece and Spain. This subterfuge won't work, because as we said in 2011, Germany is ultimately in the driver's seat.
Nicolas Veron of the Bruegel think tank agrees with us, as the Journal quotes him as saying, "Germany is pivotal in Europe, France is not."
The edge has been taken off the crisis because the ECB has chloroformed the markets with it promises of a "bazooka" of liquidity. The markets will eventually awaken again.