As always, "Mutti" knows best …
That's what we are seeing. Huge capital flows are coming into the euro area, lifting the currency many "experts" still see as doomed. Since its most recent low in late May, the euro is up 8 percent against the U.S. dollar. The euro's trade-weighted value gained more than 5 percent over the last twelve months, and it won't be long until German exporters begin screaming once again that an overvalued euro exchange rate is spoiling their trade.
Capital inflows are so strong that German equity markets are setting new record-highs, and euro area stock prices are now chasing liquidity-driven U.S. stock market indices.
Erstwhile fiscal miscreants are also seeing a slow return of investor confidence. Despite meager progress on deficit cuts, bond yields have come down since the beginning of the year in Italy, Spain, Portugal and Greece, even though, over that time, they rose by 30 basis points in Germany. That has reduced these countries' yield differentials with Germany – ranging from 36 basis points in the case of Italy to 3 percentage points in the case of Greece.
(Read more: Euro is 'too strong, too German': French minister)
What is the way ahead?
Disciplined policy easing
There are several issues to watch: growth dynamics, monetary policy, banking union and political developments in Germany and Italy.
Euro pessimists are quick to point out the monetary union's slow recovery and estimated economic growth of about 1 percent next year, compared with much stronger numbers for China, U.S. and Japan.
That is true, but that's also a good reason to bet on the appreciation of relatively cheaper euro equity markets, and on higher bond prices in an area committed to price stability and a disciplined fiscal adjustment.
Growth may also be better than currently expected. Export-driven recoveries in Portugal, Spain, Italy and Greece could benefit from some policy loosening in France and in large surplus countries like Germany, Sweden, Netherlands, Switzerland, Austria and Denmark.
Growth initiatives will be at the top of the union's summit agenda in mid-December. By that time, Germany will probably have its new government, where euro area growth stimulus is one of the key demands of German Social Democrats (SPD), the likely coalition partners with Christian Democrat parties of CDU and CSU.
(Read more: Sell US, buy European assets: Strategist)
Banking union and the ECB's tough policy call
Measures at the euro area level to stimulate growth are particularly important at a time when the monetary policy is undergoing a difficult adjustment period. The ECB's balance sheet is shrinking because euro area banks have been repaying loans they received as part of the crisis management to protect the financial system.
A steadily appreciating euro exchange rate – an event technically equivalent to monetary tightening – is also compounding the depressive impact of the shrinking money supply. That sort of policy configuration is the last thing the area needs at this stage of its fledgling recovery.