Germany and France have moved on Monday to bury months of squabbling over how to resolve the euro crisis by agreeing to form a joint policymaking body to create a more integrated economic and fiscal policy in the eurozone and structure a new banking supervision regime.

The announcement of the accord in Berlin came as Germany's leading business confidence index showed a greater than expected dip due to fears of the impact of the euro's travails on German exports. It is the fourth month in a row that German business confidence has fallen.

The German and French finance ministers, Wolfgang Schäuble and Pierre Moscovici, said the aim of the new working group was to produce common policies on how to deal with Greece, Spain and Italy. as well as mapping out longer-term strategies. The Germans hope this will conclude in a full-scale political union within the eurozone.

"We want to take joint decisions," said Schäuble, a Christian Democrat of the German chancellor Angela Merkel's party. Moscovici, a French Socialist, said the countries needed to "deepen our consultations".

The eurozone's two biggest economies have been at odds since the election of François Hollande as French president in May. He has sought a policy shift geared to growth and jobs, while Berlin, dominating the EU response to the crisis for almost three years, has emphasised austerity, savage spending cuts and debt reduction. Monday's announcement was an acknowledgment that eurozone crisis management will be paralysed if the two biggest players remain at loggerheads.

The announcement came as the German headline Ifo index of business sentiment fell in August to its lowest level since March 2010, dropping to 102.3 from 103.3 in July. However, the current assessment component of the index dropped by less than expected, from 111.6 to 111.2.

The Berlin talks kicked off what promises to be a fraught and frantic few weeks in crisis management after the August holiday lull. Policymakers at the European Central Bank (ECB) are to meet next week amid expectations their president, Mario Draghi, could unveil plans to intervene in the bond markets to try to cap Spain and Italy's borrowing costs.

The following week, the European commission is to reveal new proposals for banking regulation and supervision that are likely to give extensive powers to the ECB.

The Franco-German accord came as Spain revealed its ailing economy did worse than thought over the past two years. The country's statistics office said its economy grew by just 0.4%, rather than 0.7%. It said a recession the previous year shrank the economy by 0.3% rather than 0.1%, meaning Spain's economy has declined by about 4.5% in the four years since a housing bubble burst and the credit crunch hit in 2008.

With economists seeing a further 2% fall in GDP over the next two years, predictions that Spain is in the middle of a lost decade now look to be accurate. The economy will not return to its 2007 size until the second half of this decade.

Thousands of small Spanish savers are expected to be forced to take losses of up to 80% on preference shares in those banks when the government passes a new banking law forced on it by Brussels and the ECB in the coming days or weeks.

Many bought the shares after being cold-called by bank managers who told them they were risk-free deposits. The government is also expected to set up a "bad bank" to absorb toxic real estate assets left on balance sheets by bust real estate developers. Rajoy's sliding popularity will be put to the test on 21 October, after the government of Galicia, north-west Spain, called regional elections which will be held on the same date as those in the northern Basque country.

With unemployment in Spain at 25%, Volkswagen said it had received 1,800 applications from Spain and Portugal for 43 places for new engineers.