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"The German government believes it is leading by example in embarking on a severe round of budget cuts. But this is the last thing the eurozone needs at this point," said Simon Tilford of the Centre for European Reform in a research note this week.

I started to learn about this as I attended a fascinating afternoon of discussion yesterday at the European Council on Foreign Relations held jointly with Charles Grant's Centre for European Reform. It made the debates over the Labour leadership and the UK budget seem childish. In the first session Paddy Ashdown lambasted the fashionable hostility to the EU. "Either deepen of die" was his warning. It seems his party's Conservative coalition partners can't see what the fuss is about.

Charles Grant, director of the Centre for European Reform think tank, said the coalition had made a good start. "There's a lot of relief that the new government is not as Eurosceptic as people thought it would be. But there was also regret in Europe that Britain was not more active in tackling the eurozone crisis. Big questions of economic governance are being debated and Britain is ... marginalised and not really involved," he said.

"Policymakers in the EU have been rumbled. They've regularly fallen behind the curve and their announcements have often been full of smoke and mirrors," said Philip Whyte of the Centre for European Reform think tank. "The markets don't see how the southern European states are going to get out of the predicament they are in."

"We are seeing a sense of disarray with several voices speaking at the same time," said Clara O'Donnell of the Centre for European Reform. "But even if the EU is keen to help, the Israelis do not consider it reliable enough. There is not much Europe can do until the Americans move."

As Philip Whyte observes in a piece for the CER (Eurozone governance: Why the Commission is right), Germany's position is "one-eyed". When the global financial crisis erupted in 2007-2008, Spain was running a budget surplus, not a deficit, and its present difficulties have very little to do with government irresponsibility. They have been caused by a housing market bubble, an over-extended banking sector, very high levels of private sector debt and a rigid labour market that has exacerbated Spain's long-term loss of business competitiveness.

Some candidates "would be better members than many of the existing ones," says Simon Tilford of the CER. "But the spectre of Greece means there is very little stomach for taking on new members."

But a better atmosphere will not necessarily translate into an ambitious summit agreement, said Katinka Barysch, deputy director of the CER. "The relationship looks better, feels better, smells better," said Barysch. "Whether that can be translated into concrete achievements remains to be seen."

"This is the worst possible message they [Germany] could be sending the markets because it suggests they are still not acknowledging what the underlying problem here is," said Simon Tilford, chief economist at the CER. "Far from reassuring the market and stabilizing market sentiment, this will further undermine confidence in the ability of eurozone governments and policymakers to get on top of the crisis. It will aggravate the situation further."