Euro-Area IP Bounces Back-Part Way Will It Continue, And What Does That Imply For The Future Of The Zone Itself

EMU continues to be a bit of an enigma. Its economic data have held up, the OECD leading indicators project a slowdown. And, market treatment of Euro-area bonds has been rough, "R"-rated at least.

Bonds get bashed - Today Spanish and Belgian bonds were being roughed up in the markets. The Spanish bonds are being hit for the usual reasons and because of issuance. The Belgian bonds are hitting hard times because of long standing divisiveness that has split the country and kept it from seating a real government. Finally the ratings agencies have begun to have enough of that.

Data are resilient - Yet, here is EMU IP bouncing back like an irrepressible puppy after having been kicked to the side in September. October's 0.9% spurt still does not get it to where it was two months ago. But over three-months IP growth rates in EMU are positive and the three-month pace is ahead of the six month pace. Both are, however, way below the pace of 12-months.

Do too many of the hopes hinge on Germany? Of the FIVE EU/EMU countries whose IP we track, Germany and UK have the strongest IP and Germany is the whole of the reason for the EMU rate to be up; Germany's IP rose by a stunning 3.1% pace in October and is up at a spectacular 18% pace over three months far ahead of tis yr/yr growth rate of 13.5%.

Rest of Zone is less vigorous - IP in France fell in October; Italy's index was flat; Spain's edged higher by 0.2% after wide fluctuations in the previous two months - not much solace on the outlook from these big guys.

Will negativity spread? With the ongoing debt problems it is a question of how long before these troubles begin to gnaw away at consumer confidence. In Italy, Berlusconi barely survived a political vote of no confidence. He is lucky that the vote was binary, because in reality he got a vote of very little confidence. And with all that Italy has left to do it is not clear how with this bare-bones survivalist mandate Berlusconi is going to get it done.

It's not really about debt you know...

'OK' is not necessarily 'all-right' - On the recent monthly numbers alone, however, the EMU is looking OK and maybe even like it is trying to right itself. But behind the scenes we know there are processes with long lags in operation undermining recovery. The markets are far from reassured. Ireland is a ticking time bomb. Spain and Portugal are trying to keep from being sucked into the debtors' vortex. Some wonder about Italy-the country of the Treaty of Rome that began the move toward greater European integration. If Italy goes-all bets are off... or are they?

A brief history of which to be aware before you throw out the baby with the bathwater – The Treaty of Rome, signed in 1957, laid out a vision of a united Europe, it put the formation of the EEC in motion. The precursor to this plan had been launched in France with the initial ideas being promoted in 1950: the Iron and Steel Community. Its objectives were codified under the Treaty of Paris. Its objective was in part to keep French and German rivalry from boiling over by forming a more inclusive trading community. We see that same objective in the formation of the EU and of EMU in modern times. These plans to fuse Europe and diffuse rivalries have long-standing histories. Of course they were forged in different times with different fears in the fronts of peoples' minds, not in the back or in some forgotten Alzheimer's-ridden space. It is reasonable to ask if mere economic strains will break down what has been inexorable, if sometimes erratic and glacial, progress. This is a train that has been in motion for over 60-years in contrast to the relatively short life of EMU that many talk of when they speak of euro-unraveling and of a lack of commitment. Is there really a lack of commitment, or was EMU just poorly laid out? Was EMU just a bad idea that won't work? Is it something to patched and fixed? Is it part of longer 60-year legacy with a real political will behind it that should not be short-changed despite its need to be fixed?

What are the REAL ties that bind Europe? When push comes to shove, is the geopolitical will in Europe stronger than the economic ties that bind? Is the real 'will' geopolitical or economic? That is the root question here. Economists that are forecasting the break-up of EMU see only the economic side and discount the political will.

The European legacy - In fact after the Iron and Steel Community was formed the Treaty of Rome's EEC became the EC and then the EU and eventually EMU was formed out of part of the EU. Both EMU and EU stand today with the British in their familiar one-leg-in-and-one-leg-out stance. Italy is an important European and EMU nation with significant problems. But the train to European integration has been on a long ride. Will Italy, once the motivator of integration, send the Zone on a path toward disintegration? Can 60-years of progress be wrong? Is a 'common currency' just one ambitions step too-far for a people that 60-years ago dreamt of European integration? Is this all the farther it will go, or are they willing to go further to preserve their dream? To put another way, when Europeans dream, do they dream of being German, Italian, or French or of being European as it says on their passports? That will decide the fate of the EMU not Italy's or Spain's or Portugal's debt problems.

As I said above, it's not really about debt.