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German migrant chaos economic clouds progress in France, Italy, Spain

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Existential threats to Europe's monetary union and Germany's disastrous mismanagement of migrant/refugee inflows have obscured the real progress achieved by France, Italy and Spain (equivalent to half of the euro area GDP) in stabilizing their ailing economies.

Here are some indicators about their current cyclical positions and key drivers of their short- and medium-term economic developments.

These three countries displayed surprisingly robust demand and output conditions at the beginning of the fourth quarter, traditionally the time of strong production gains in an inventory buildup for the busiest retail season of the year.

In the three months to October (the latest data available) industrial production in France, Italy and Spain rose at annual rates of 2.3 percent, 1.9 percent and 2.9 percent, respectively.

All these numbers are markedly above the euro area average of 1.5 percent. They even beat the dismal 1 percent output growth of Germany's mighty manufacturing sector.

Jobs and income gains

Retail sales show that these production numbers are no flukes, because output gains are underpinned by a steady revival in household spending.

France, Italy and Spain recorded retail sales (volume terms) increases of 3.6 percent, 1.1 percent and 4.5 percent, respectively, during the three months to October.

Except for Italy, these numbers are significantly above the euro area average of 2.6 percent. And Germany looks decidedly frugal with its retail sales increase of 2.7 percent.

Now, we still have to see the November and December numbers. My guess is that they will probably be very good, judging by what happened last year to consumer spending in the run-up to Christmas and New Year holidays. In fact, recent media reports on retail traffic in some of these countries, including even the impoverished Greece, are quite encouraging.

For my part, looking at those sophisticated holiday menus all over the French papers – featuring caviar, free-range turkeys and vintage wines – I was feeling like a hopelessly poor cousin. But I consoled myself with the thought that the horrendous terrorist attacks in Paris in November had not dented spirits in the land of Epicurean pleasures.

What can we expect in the months ahead?

As always, three key factors will continue to determine the strength of economic activity in these erstwhile basket cases of the euro area economy. These factors are jobs, incomes and credit costs.

The labor market situation in France is not good. The unemployment rate in October stood at 10.8 percent, slightly higher than in the same month of last year, even though most of the new employment contracts were for part-time or temporary work. In spite of that, the real disposable income is estimated to have risen 1.7 percent this year, and a further increase is expected next year as the government steps up work on the "feel-good factor" for general elections in May 2017.

Italy did much better on employment growth: The jobless rate was cut by nearly two percentage points in the year to October to 11.5 percent. But that is still nearly double the pre-crisis unemployment rate of 6.1 percent. The center-right parties are gaining ground on the Socialist government. The pressure is on to cut taxes to rev up economic growth and job creation.

How much of that will actually happen is not clear at this point, but the planned fiscal easing is expected to accelerate the growth of the real disposable household income to more than 3 percent next year from an estimated 1.3 percent this year.

Spain is in an entirely new, uncharted territory after recent general elections, where traditional right and left parties lost to political upstarts in search of radical economic and socio-political changes.

But whoever succeeds in forming the new government will inherit good growth and employment dynamics. The current unemployment rate of 21.6 percent was brought down by 2.4 percentage points in the year to October, mainly through part-time, temporary and "gray economy" employment. This has led to complaints of a new class of working poor, but at least these people now have some income and don't have to rely on charity for survival.

As an aside, you may wish to wonder about these dire socio-economic statistics in Spain, because they are difficult to square with the country's buoyant retail sales, and an estimated 3 percent increase in private consumption this year – substantially above the Germany's and euro area estimates of 1.7 percent and 1.9 percent, respectively.

And if you are looking for the wellsprings of the French, Italian and Spanish economic revival, look no further than the ECB. The euro area central bank is an unsung hero of these economic recoveries; it helped to patch up the ailing banking systems and provided a strong and a creative antidote to the devastating German diktat of fiscal austerity.

The most recent numbers show that the ECB's broad monetary aggregate, M3, accelerated to an annual rate of 5.3 percent in October from 4.9 percent in the previous month. The strengthening demand for money is very good news, and the increasing bank lending to euro area businesses and households indicates that the monetary policy is connecting with the real economy.

Investment thoughts

Media accounts of Europe's horror stories and fears of radical political changes are an excellent background for contrarian investment strategies.

France is experiencing (a) an erosion of government authority not seen since the twelve years of the Fourth Republic's 21 governments , (b) deep social divisions and home-grown terror threats and (c) the possibility of unpredictable moves by a government facing almost certain defeat in the next general elections, due in the spring of 2017.

Italy's right of center parties are making advances as the electorate seems increasingly impatient with the promises of more jobs and higher incomes of a tough-talking Socialist prime minister.

Spain is likely to remain in an elusive search of a stable government – and an unknown program of governance – for months to come.

Germany, according to its mainstream media, is just a terrorist attack away from a collapse of an already tenuous coalition government. The same apparently knowledgeable sources contend that Germany's growing local and regional disorders, caused by an unmanageable migrant crisis, could also lead to the same result.

Italy is telling Germany to stop bossing Europe around with its selfish double standards. The smaller Central European states are furious at Germany for the migrant mess it created; their war veterans are ready to defend the homeland with firearms, barbed wires, walls … whatever.

What's left? Who will mind the euro store?

The ECB, of course. That great institution will continue to hold things together until … the politicians surrender and abandon the Europe's impossible dream.

In case you are wondering about alternatives, please note that Germans are now hoarding 13 billion of their trusted and beloved Deutschemarks. They don't want to give them back to their once venerated central bank.

I wish you a happy and a prosperous New Year.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.