Germany Different Than EMU...but It Is Still the Region's Bellwether...for Now

While Germany's IFO survey is still looking to be bullet-proof in October orders fell and fell sharply in September, setting a pattern to be followed throughout the e-Zone (see the accompanying table). German domestic orders dropped slightly, but foreign orders plunged as they have done for other EMU members as well.

This month's data may be perched on the cusp of change. We rarely see such divergence except when the economic gears are shifting, and shifting they are...

In Germany we continue to see its vaunted IFO index spinning off strong signals. Apparently consumer confidence is still strong in EMU as the European Commission let that nugget fly early. Ireland is in the cold embrace of austerity. It is set to cut some 7bln Euros from its budget, two-thirds from spending cuts and one-third from higher taxes. I'm sure that won't add to consumers' confidence around the Zone. Even if you are not Irish you can see what's coming. Demands are being made across the board.

As the zone's most favored economy Germany is setting the tone; the speed is to Germany's liking. But Germany is better positioned for this so its economy is still prospering while others struggle. Germany is reaping the benefits of having run the lowest inflation rate in the zone and having the best competitiveness. Spain, Portugal, Italy and Greece would love to devalue their currencies to reinvigorate their economies, but there are tethered to the Deutschemark in the no-love-lost lip lock called the Euro-Zone. Right now it must feel a bit like debtors' prison.

There are lots of rumors about the zone and about what happens next: Which countries are next to choke on the poison pill of austerity?

Will the Zone really come apart at the seams?

Will the Germans, angry about having to be the financial backstop to unworthy profligate fellow Euro borrowers, try to exit the Zone? Would they? Could they?

I don't think that a German exit is possible. The quid pro quo for German unification was the Europeanization of Europe. Not melding Zonal fiscal policies and trying to keep national identities while at the same time trying to blur them has shown itself to be the incongruent strategy that it was from the start. It has proved to be the Achilles heel of the unification that is not-unification. Still, if Germany wants to go it alone, what better way than to show those who 'would-be-German' what a steep hill it is to climb to be both fiscally responsible and to maintain a strong currency? The divergence, rather the persistent divergence in intra-EMU inflation rates tells the story of who is in trouble. Getting back in line will be an excruciatingly painful process. Devaluation, the traditional medicine, is no longer an option. Germany struggled with its own unification. Europe has a much less strong glue than that nationalism to depend upon.

What happens next is up for grabs, but don't expect it to play out quickly; there are slow-working and very painful processes in train. Anything could happen...almost... but only over time when it become clear that the actual pain exceeds the national embarrassment of the bailout.

Selected Euro-Area Industrial Orders SAAR Except M/M Mo/Mo 3Mo 6Mo 9Mo Euro Area Detail Sep10 Aug10 Jul10 Sep10 Aug10 Sep10 Aug10 Sep10 Aug10 MFG Orders -3.8% 5.1% -1.7% -2.3% 25.1% 11.1% 35.3% 13.5% 21.3% MFG Sales -1.9% 2.5% -1.0% -1.9% 6.9% 3.7% 15.0% 9.7% 11.9%   Consumer -1.2% 1.1% 0.1% 0.1% 1.1% 0.8% 7.4% 4.0% 4.4%   Capital -2.7% 3.2% -2.3% -7.1% 11.7% 1.8% 15.5% 5.9% 11.6%   Intermediate -0.9% 3.5% 0.0% 10.9% 9.9% 10.9% 28.2% 8.1% 10.4% Memo:MFG Total Orders -3.8% 5.1% -1.7% -2.3% 25.1% 11.1% 35.3% 13.5% 21.3%  E-13 Domestic MFG orders -0.9% 3.5% 0.0% 10.9% 9.9% 10.9% 28.2% 8.1% 10.4%  E-13 Foreign MFG orders -5.1% 5.2% -0.3% -1.7% 23.9% 12.9% 36.1% 19.9% 30.4% Countries: Sep10 Aug10 Jul10 3Mo 3Mo 6mo 6mo 12mo 12mo  Germany (MFG): -3.5% 3.6% -2.0% -7.6% 26.3% 12.9% 34.3% 18.2% 25.5%  France(Ind): -1.6% -0.9% 2.2% -1.3% 16.2% -1.7% 14.9% 0.6% 9.6%   Italy (Ind): -1.2% 6.8% -1.7% 15.7% 13.7% 21.9% 31.9% 17.2% 27.6%  Spain(Ind): -1.3% 6.3% -6.0% -5.3% 16.7% 5.3% 17.0% 6.1% 8.4% Compare: US Factory Ord 2.8% 0.0% 0.5% 14.4% -0.2% 3.8% 1.6% 10.8% 10.2% Some E-zone reporters are timely and some lag. This table allows a sequential inspection of trends regardless of topicality.