Today’s press announced that Germany’s industrial sector recorded a 12.1% increase on the previous year, outperforming most of the other Eurozone peers, and was boosted by another rise in business morale, as ZWE indicator of economic sentiment climbed 2.5 points in November.

Many countries, especially Ireland, Portugal, Greece, Italy, have particularly strong problems with their finances, facing difficulties raising money to fund their state budgets. Spain is currently in the news due to Moody’s, a rating agency, threatening to downgrade the country’s creditworthiness again (currently at Aa1). For Spain, the main trigger is to recapitalise its struggling banks and to coordinate cost cuttings with the regional governments (Spain being a federal state, the central government has not as much influence as it would wish for).

Nevertheless they start to take drastic measures to improve their own finances, cutting costs and dressing up for international investors. Huge efforts are on their way to bring their first fruits and as soon as the reforms are confirmed and the budgets back to normal the formerly falling countries will be back on a growth path.

The strong recent German economic performance supports German government but could lead to a phase of a slower path of reform. As the economy seems to outperform most of its peers, we are less likely to see any unpopular cost cutting measures. It is simply not in the blood of a politician to start painful measures when most of the population is doing well (unemployment being on the lowest level since years). And as the polls are currently rather gloomy for the current conservative government (forecast to lose their majority in parliament if there would be an election next Sunday), the chancellor will probably scale back some reforms in order to improve the negative image and gain some ground for the next elections.

One might think that the Euro is currently the biggest problem but as in any crisis of confidence, and I believe that it is only a crisis of confidence, as soon as reforms start to show their merits, and as soon as the panic calms down and investors get back to normal, the Euro will recover. Additionally, a weak Euro helps most of the Eurozone members to boost their exports and thus stimulate their economy artificially.

The real risk for Europe is that in a couple of years, Germany is the sick man of Europe again due to the lack of significant reforms and cost cutting measures undertaken by the federal government. As Europe’s largest economy, a struggling German would be another drawback for the Eurozone’s economy. It is therefore right to refuse the euro bond idea as it would increase refinancing costs for the German government, but refusing euro bond is one thing, necessary and painful reforms are another thing, yet to be undertaken.