German Confidence Ekes Out Gains While Questions Swirl

German confidence continues to edge ahead. In February GfK estimates that it will rise to 5.7 from 5.5. At that level confidence stands in the top 16% of its ordered queue of values and in the 65th percentile of this high-low range. These are good firm metrics but not blockbuster readings.

Loco-Motive: While it is good to see German confidence improving it is improving at a begrudging pace. Moreover, the rest of the Zone is still troubled. And Germany is still expected to be a locomotive. Right now Germany is more 'loco' than 'motive'.

Subtle shifts in 2011 - As we open a new chapter in 2011, we find Spain engaging in important banking sector reform and reform aimed at rehabilitating the cajas that were crushed by the collapse of Spain's construction sector. As a result of these steps, Spain's economy is still under a great deal of pressure but the spreads it pays over German bonds in the bond market are improving (narrowing) and have been improving steadily this year.

UK economy cries UNCLE - The newest casualty of austerity is the UK. Last year it announced an austerity program with a VAT hike to go into effect in early 2011. But the economy has beaten the UK authorities to it and registered a decline 20101-Q4.

The VAT trap and BoE - UK data have been erratic and the true UK economy has been hard to pin down for some time. UK inflation has been above even the higher mark tat authorities were allowing for. When a nation uses the VAT and hikes taxes that act by itself raises the inflation rate as the higher tax becomes embodied in the price level. Over time the higher tax may be squeezed out of the inflation rate as consumers respond and spending weakens damping the trend in underlying prices. But the impact effect is to ratchet inflation higher.

Beat that dead horse! - Is inflation such a problem in the UK with GDP declining? Andrew Sentance of the BOE policymaking committee is pushing for rate hikes as UK GDP drops unexpectedly. In reaction to the GDP news the pound also reacted, tumbling on the world's foreign exchange markets. There is a lot in play at the moments as markets try to reposition themselves for an event they had expected but had not expected so soon. It's like the difference between a birthday party and surprise birthday party (after all you do KNOW when it's your birthday…) except it's not as much fun.

ECB meets is Scylla and Charybdis - This same dilemma is visited on the ECB where its head, Jean Claude Trichet, has begun to throw down the inflation gauntlet- at least in his rhetoric. In a Q&A with the WSJ yesterday, Trichet would not be drawn into a discussion of the very different policy paths chosen by Europe and the US. Instead, he said each economy was different and both have the same objectives for policy. I guess he is referring to the two different approaches: the barrel of vinegar Vs the spoonful of sugar. Europe, however, has a huge schism to deal with on its own as it has very definite geographic regions that are sovereign nations and that are undergoing every different economic circumstances. All are served by only one monetary god: the ECB. Is German inflation really a risk with the rest of the zone so feeble and undergoing so much fiscal contraction? Do the needs of the one exceed the needs of the many? Shouldn't monetary and fiscal policy try to coordinate a bit more instead of both pushing in the same direction? Won't the weakness across Europe make it harder for Germany to create inflation? After all, Germany's growth rate is not exactly surging. Consumer sentiment is not in a moon shot – it does not even have the velocity to boost itself into a stable orbit.

Back to the Future or living in the past? All of these questions and more are in train. But what is changing is that the onus is shifting in Europe from a concern of solvency and stability to price level stability and later to growth sustainability and the concerns will cycle back to where they started. Europe is still influx and is far from being out of the woods with its policy dilemmas. The IMF is weighing in with some newer upbeat forecasts and more advice that everyone seems sure to ignore.

It's 2011 and so how different are things really. What did we learn from our financial crisis and where do we see it in policy changes? Let me know, please.