An interest rate cut now looks to be on the agenda within the next month, following the sudden departure last week of "Red Oskar" the German finance minister. It is still possible, however, that the expected reduction may be postponed as a result of the subsequent resignation of the European Commission.
Germany and Italy are both still close to recession and a rate cut is needed by both countries to help bail out their economies. It is arguable whether similar medicine is required by France and the rest of the euro zone, but on balance it is thought the European Central Bank now has a bias to cut rates. The main reason for holding off - the fear that the ECB would be seen as capitulating to Mr Lafontaine - has now been removed.
Of course, there are those who argue that the declining euro has done the job of a rate cut and so it has, to some extent. It is certainly helping companies across the euro zone. Indeed, the declining euro may actually be a bigger boost to a recession-bound Germany than any cuts in interest rates. Most German consumers and businesses borrow long-term money and they are thus far less exposed to short-term interest rate cuts than their Irish counterparts, where most of the commercial sector and nearly all consumers still base borrowings on variable rate or on one-year fixes.
But the ECB will be worried that a resurgent euro could quickly undermine this progress.
Thus, as Ms Alison Cottrell, chief international economist at Paine Webber points out, the ECB is likely to go out of its way to put off any significant appreciation in order to allow cautious European business as much time as possible to get back on its feet.
It is important to remember that the euro is only weak in relation to where it started out this year, rather than where its constituent currencies were trading against the dollar and sterling over the course of last year.
It is now quite likely that the weaker euro - on top of Mr Lafontaine's departure - will start feeding through to reviving exporter and business confidence, particularly in Germany.
After all, many of the proposed tax increases in Germany will now not go ahead. The new Finance Minister, Mr Hans Eichel, will lower corporation taxation alongside the proposals to cut personal taxes.
As people begin to look at the possibility of German recovery, the euro is likely to begin to rise and that will be the moment when the ECB steps in and cuts rates.
Many, including Paine Webber's Ms Cottrell, expect this cut on April 8th, if the euro has turned the corner by then. The ECB's first progress report is due in mid-April and is followed by IMF and World Bank meetings. These meetings last October put pressure on the ECB to cut rates, although it did, of course, require even further prodding by Mr Lafontaine before a cut was eventually agreed at the end of November.
However, it is possible that this week's resignation of the entire European Commission may have put this back a little. The ECB may be more reluctant to act when foreign investors perceive there is a gap at the centre of European decision making.
There are questions about how quickly the German economy will recover. Many had assumed that Mr Lafontaine's resignation would lead to a more robust economy as business confidence picked up and while this is still likely, there are now questions being asked about whether Chancellor Schroder is as significant a winner as a result of Mr Lafontaine's resignation as many at first assumed.
There is a possibility that Mr Lafontaine left for personal reasons rather than solely political ones and many in Germany now suggest that Mr Schroder will not be able to represent the heart of the SPD as Mr Lafontaine did. This is the context of Mr Lafontaine's remark last Sunday that the "heart beats on the left". As a result, Mr Schroder may face serious opposition in the Bundestag, despite the coalition's nine-seat majority.
The problem for the chancellor is that unlike Tony Blair and the British Labour Party, the SPD won the general election without first winning party-wide support for reform. And as one Frankfurt watcher noted this week, he can no longer make use of Mr Lafontaine as a scapegoat for anti-business policies.
Few doubt, however, that the Chancellery Minister, Mr Bodo Hombach, and the Economy Minister, Mr Werner Muller, will take industry concerns far more seriously in a more centrist non-interventionist approach. Mr Muller takes over the finance ministry until the inauguration of Mr Eichel on April 8th after he steps down as Hesse state premier.
And few doubt their intention to cut corporation taxes, which the German government will be hoping will provide some incentive to employ more. It is likely that Germany's Stability Programme is now on a much sounder footing. There had been a suspicion that Mr Lafontaine viewed the programme as a loose commitment which could be dropped at will. But the new regime is thought less likely to breach the 3 per cent deficit limit.
Both these factors will be seen as being positive for German growth and hence the euro. But of interest to us and of course the British is the likelihood that moves towards tax harmonisation are still likely.
