German business confidence slips again in October
OCTOBER 27, 2014 11:00PM
German business confidence slumped in October, a key indicator showed on Monday, suggesting that significant growth risks remain in Europe's largest economy.
However other data released on Monday points to a bottoming out of the eurozone's weak bank lending trend, although experts doubt that this will rebound soon.
Taken together, the reports signal that the eurozone will have a tough time emerging from near stagnant growth levels in the near term, even if the risks of a credit crunch have subsided.
The closely watched Ifo Institute's survey's lead indicator for Germany fell to 103.2 in October from 104.7 in the previous month. The drop was below analysts' expectations of a decline to 104.5 and comes on the heels of recent data showing sharp declines in Germany's key industrial sector in August. It was the Ifo indicator's sixth straight fall, reaching its lowest level in almost two years.
"The outlook for the German economy deteriorated once again," Ifo President Hans-Werner Sinn said in a news release.
The data point to much lower growth in Germany than was expected earlier in the year. Germany's DIHK Chambers of Commerce Monday cut its 2014 growth forecast to 1.3 per cent from an earlier 1.5 per cent and sees growth next year at 0.8 per cent.
German gross domestic product contracted slightly in the second quarter after strong growth in the first three months of the year. Recent data point to slight growth, at best, during the third quarter while the Ifo figures forecast a sluggish start to the fourth quarter too.
"The economy in Germany is being thwarted from many sides," DIHK chief executive Martin Wansleben said on Monday in Berlin, adding that above all, international crises were dampening growth. Germany's government and leading economic think tanks have also recently sharply cut growth forecasts.
As the largest economy in the currency bloc, Germany's prospects have a clear impact on developments in the wider eurozone, particularly with other euro members such as France and Italy struggling with stagnation or recession.
Other data Monday showed some preliminary signs of improvement in bank lending, but it may take time for this to feed through to the economy. Data from the European Central Bank showed lending to firms and households continued to decline in annual terms in September, though the pace of contraction was narrower than in previous months.
"While the data are somewhat better than expected, pointing to a bottoming out of the credit cycle, they still don't signal a strong credit recovery over the coming quarters,” ING analyst Peter Vanden Houte said.
The figures came a day after largely positive results from the ECB's long-awaited health check of European banks. The ECB said on Sunday that all but 13 of the continent's leading banks have enough capital to ride out another economic storm.
The results of the so-called stress tests suggest that most lenders are in a position to make loans to eurozone firms and households, although there is still serious doubt as to whether there is sufficient demand for loans, given stagnant growth and rock-bottom inflation.
The eurozone barely grew in the second quarter versus the first quarter and might not have grown at all in the third quarter. Its inflation rate of 0.3 per cent puts it dangerously close to a deflationary environment, which some experts say would push consumers to delay purchases and make debts harder to repay.
The ECB has pledged to buy asset-backed securities and covered bonds to help bring annual inflation closer to its target of just under 2 per cent, and has extended conditional loans to banks at four-year maturity.
ECB's foray into bond buying may help Europe's rich get richer
London
EUROPEAN Central Bank president Mario Draghi, fighting a deflation threat in the euro region, may need to confront a concern more familiar to Americans: income inequality.
With interest rates almost at zero, Mr Draghi is moving into asset purchases to lift inflation to the ECB's target. The more he nears the kind of tools deployed by the Federal Reserve, the Bank of England (BOE) and the Bank of Japan, the more he risks making the rich richer, said economists including Nobel laureate Joseph Stiglitz.
In the US, the gap is widening between the incomes of the wealthy, whose financial holdings become more valuable via central bank purchases, and the poor. While monetary authorities' foray into bond-buying is intended to stabilise economic conditions and underpin a real recovery, policymakers and economists are increasingly asking whether one cost may be wider income gaps - in Europe as well as in the US.
"The more you use these unusual, even unprecedented monetary tools, the greater is the possibility of unintended consequences, of which contributing to inequality is one," said William White, former head of the Bank for International Settlements' monetary and economic department. "If you have all these underlying problems of too much debt and a broken banking system, to say that we can use monetary policy to deal with underlying real structural problems is a dangerous illusion."
The divide between rich and poor became part of a widespread public debate following the publication in English this year of Thomas Piketty's Capital in the Twenty-First Century. He posited that capitalism may permit the wealthy to pull ahead of the rest of society at ever-faster rates.
Olivier Blanchard, chief economist for the International Monetary Fund, said in April that "how inequality affects both the macro economy and the design of macroeconomic policy will likely be increasingly important items on our agenda". BOE chief economist Andrew Haldane said in May that it's "appeared on central banks' radar during the course of the crisis, sometimes flashing red". The US has the third-highest level of income disparity among 28 countries in the developed world, after Turkey and Chile, according to the most recent figures from the Paris-based OECD. The so-called Gini coefficient for the US was 0.39 in 2011, the OECD found. No euro country exceeded that; the highest for the region was Spain at 0.34.
Federal Reserve chair Janet Yellen said on Oct 17 that she was "greatly" concerned by what she said was the biggest increase in disparities of wealth and incomes since the 19th Century.
"It is appropriate to ask whether this trend is compatible with values rooted in our nation's history," Ms Yellen said in a speech in Boston, without referencing monetary policy.
A month earlier, she noted that the unemployment rate was 8.1 per cent when the purchase programme began - it's now 5.9 per cent - and praised the "cumulative progress towards maximum employment" since then. The Fed plans to announce the end of its asset-buying programme, known as quantitative easing, or QE, this week at a meeting starting on Tuesday.
For both the Fed and the ECB, an improving economy is the most important goal and inequality issues shouldn't overshadow that, Mr White said.
"The fact that it's good for some people more than others is not an argument for saying don't do it," said Mr White, now chairman of the economic and development review committee of the Organisation for Economic Cooperation and Development. "Poor people now are relatively poor vis-a-vis the rich, but on balance everyone is better off than they would have been if the central banks didn't do what they did."
The ECB is sensitive to the links between central banking and income distribution.
"We need to be aware that there are distributional consequences of our actions - and these may well be particularly significant at times of exceptionally low interest rates and non-standard measures," executive board member Yves Mersch told a Zurich audience on Oct 17. While traditional moves, such as changing interest rates, may not affect income distribution, non-conventional tools, "in particular large-scale asset purchases, seem to widen income inequality".
Mr Draghi hasn't yet put the issue at the centre of a policy speech, though his presentation at a meeting of central bankers in Jackson Hole, Wyoming, urged governments to accept their role in introducing reforms to shore up economies.
With unemployment hovering at 11.5 per cent in the 18-nation currency region, Europeans who don't hold the assets that get an immediate boost from the ECB's actions may find themselves left out. The BOE estimated that its £325 billion (S$667.07 billion) of purchases through May 2012 increased UK household wealth by more than £600 billion.
That would equate to a boost of about £10,000 per person if financial wealth were evenly distributed across the population. But it's not: The central bank says that the top 5 per cent of British households hold around 40 per cent of stocks, bonds, real estate and the like.
In Europe, "the experience would be pretty much the same as the US experience", said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "Home prices will rise and financial-asset valuations will rise so those people who tend to have more of those, the upper half of the income distribution, will tend to benefit more."
The ECB has already promised to expand its balance sheet by as much as one trillion euros (S$1.62 trillion) by buying private-sector securities. The goal is to get inflation, now at just 0.3 per cent, closer to its target of just below 2 per cent. The bank settled 1.7 billion euros of covered-bond purchases last week as part of the economy-boosting programme.
More than half of respondents in a Bloomberg News survey conducted from Oct 3 to 9 say the ECB will have to start large-scale government bond buying. Its balance sheet has shrunk by about a third since 2012, depriving the economy of the cash needed to stoke a pick-up in inflation.
"Our outlook isn't particularly bright on the European economy," said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former associate director of monetary affairs at the Fed. "They want to give the current strategy a chance to work. It won't be very effective, and the odds are about even that they'll do QE. Unless the inflation expectations and growth outlook improves, the ECB has no choice." BLOOMBERG
European Central Bank prepares path for more stimulus
AP NOVEMBER 07, 2014 7:13AM
Mario Draghi, following a meeting of the European Central Bank in Frankfurt. Source: AFP
EUROPEAN Central Bank head Mario Draghi has opened the door wider for further stimulus, saying the bank is laying the technical groundwork for new measures that it could deploy if needed.
Stocks rallied and the euro slumped on the news.
The ECB did not announce any new monetary support programs after its governing council meeting. It left its key interest rate at a record low of 0.05 per cent.
But Mr Draghi jolted markets with his declaration that more measures were possible — and that the ECB’s governing council was behind him, dismissing media reports he was facing resistance.
The euro fell to around $US1.24, the weakest level since August 2012, when Mr Draghi famously promised to do “whatever it takes” to save the euro.
Monetary stimulus can weigh on a currency.
Germany’s main stock index jumped 1.4 per cent before edging back to a 0.7 per cent gain.
Mr Draghi said the 24-member governing council has tasked staff “with ensuring the timely preparation of further measures to be implemented, if needed.”
Markets appeared to interpret that as a prelude to a program in which the central bank would create new money and use it to make large-scale purchases of government bonds from banks and financial institutions, as the US Federal Reserve has done. Such a program, dubbed quantitative easing, or QE, can boost stocks, lower market interest rates and, eventually, help growth and company profits.
Mr Draghi left open, however, exactly what new measures were under consideration. The ECB has discussed QE in one way or another for months but held off. The question now is whether Mr Draghi and the ECB will finally go ahead as eurozone economic indicators continue to disappoint.
Analyst Christian Schulz at Berenberg Bank saw a 60 per cent chance that the ECB would announce in December that it will purchase corporate bonds, not government bonds. That could have a stimulus effect while avoiding charges the ECB is bailing out indebted governments by buying their bonds.
Joerg Kraemer, chief economist at Commerzbank, expects the ECB to launch QE at the start of next year. “This will make virtually no change to low growth and low inflation, but will help highly indebted countries and their banks,” he wrote in a note to investors.
The ECB faces scepticism about QE in Germany, the eurozone’s largest and most influential member. Sceptics say QE would just take pressure off governments that need to make their economies grow by cutting bureaucracy and making their labour markets more flexible.
And there is debate about how much good it would do.
Unemployment has fallen steeply in the United States, but some economists question whether that is due to QE.
By holding off new announcements, the ECB also wanted to give steps it has already deployed a chance to work. This year it slashed its benchmark interest rate, offered cheap loans to banks, and started purchasing bonds backed by bank loans. All are steps aimed at easing credit to companies to encourage investment and growth.
The eurozone economy did not grow at all in the second quarter, and inflation is a mere 0.4 per cent, raising concerns the bloc may fall into deflation, a sustained drop in prices that can encourage consumers to put off spending.
Mr Draghi said the council had examined the experience of other central banks including the Fed, Bank of Japan, and Bank of England, all of which have done QE. He said that each economy was different and the effect depended on the local situation.
He added that other banks’ experiences “are very important in that they make us think how to make the most of the measures that we may be taking, if needed.”
AP
I seriously think breakup of EU will be the next Global Financial Crisis Trigger
War & peace - Euroland Monetary Union
Geoff Kitney
5511 words
8 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Inside story It is the birthplace of Western culture and the axis of two world wars, a continent that has ripped itself apart and united under the EU. But Geoff Kitney discovers, as he crosses frontiers once the scene of fierce battles, the union has created its own catastrophes – and new unease about Germany.
The heavily wooded hills and scrubby gullies of the Orcia Valley in the Val d'Orcia region of Tuscany must have been a hellish place to be in the worst days of the Second World War.
Accounts of that period tell of woods filled with all kinds of desperate people – refugees and civilians fleeing air-raid ravaged towns and villages, partisan fighters, deserters from several armies, draft dodgers and military patrols.
The allied campaign to defeat the Italian fascists and drive the German occupation forces from this region, which raged through late 1943 until the late summer of 1944, was especially ferocious. The Germans had established a military headquarters at La Foce, about 70 kilometres south of Sienna and fought bitterly to retain control of the region.
Seventy years later, Tuscany's war story is almost forgotten. La Foce, the site of one of Europe's most famous gardens, created between the wars by British garden designer Cecil Pinsent, is now a major Tuscan attraction. The beauty of the area belies this violent chapter in its history.
And there surely cannot be anywhere in this region closer to paradise than San Filippo, a small village hidden in the heavily wooded foothills of Mount Amiata, Tuscany's highest peak.
San Filippo sits above babbling artesian springs from which hot water (52 degrees) spills over white marbled waterfalls, forming dozens of steaming, crystal-clear pools as it flows several hundred metres down a rocky gully to a river below.
It's a sublime indulgence to float your cares away in a warm, natural bath, under the cool green canopy of the Tuscan forest.
It's easy to imagine how the fugitives in the forests in those war years might have been tempted to risk their lives to slip out from their cover and into the soothing warmth of one of these pools. Today, the only risk to those lucky enough to have discovered this natural wonderland is in slipping on rock faces, polished smooth by the high mineral content of the water flowing over them.
But not all who were bathing here on a beautiful autumnal afternoon recently were able to unconditionally surrender to the magic of San Filippo's warm springs.Dreams of Down Under
It has always been easy, travelling in Europe, to start a conversation when you say you are from Australia. This is especially so with young Europeans – especially now. And the conversations almost all end up at the same point.
When three local young men who had asked to share our pond learnt that we were from Australia, the questions they asked were the same as we had been asked many times over several weeks of travel in several European countries.
"Are there any jobs in Australia? Could we get work if we went to Australia?" They were in their mid-20s and unemployed. Like many other young Italians, they were beginning to see emigration as their only hope of ever working. The next day, we had a similar conversation with a university student who worked as a guide to a cluster of tunnels that honeycomb under the nearby town of Chiusi and were constructed by Etruscan slaves as far back as 700BC.
The guide said her casual job at the museum would cease when the tourist season ended and she saw little prospect of a job when she completes her studies in ancient history, philosophy and religion next year. She was depressed about the future of Italy. "We have many serious problems."
A young graduate, whose only job had been as a waiter in a family restaurant near the Swiss border in northern Italy, asked us what his chances might be of finding work in Australia as a barista.
He said he hoped to get a temporary job at next year's World Expo in Milan, but would try his luck in Australia after that. Several friends were already in Sydney and Melbourne. Others had headed for Germany and England, where they hoped to find better prospects.
In France, a young couple fretted about the future of their country and the prospects for their three children of finding careers. They despaired about the state of politics in France and said they were worried about the rise of the far-right political movement, the National Front.
Bruno Amable, an economics professor at the University of Paris-Sorbonne and a long-standing critic of the institutional structures and policies of the European Union, told me he believed it was a realistic possibility that the National Front's leader, Marine Le Pen, could win the French presidency because voters were becoming so disillusioned with the major parties.
Even in Germany, where unemployment rates are lower, a family friend completing a doctorate in history at a Berlin university says that he sees no prospect of employment in his field.
At best, he can see short-term, casual jobs as his only prospect of earning a living.Catastrophic outlook
The unemployment crisis in Europe in the wake of the global financial crisis is serious and intractable. For young Europeans, it is little short of catastrophic.
Across the EU, 23 per cent of young people looking for work cannot find a job. But that's the average. In Greece it's 50 per cent, in Spain 54 per cent, in Italy 43 per cent, in Portugal 35 per cent and in France around 25 per cent. The percentages are eye-watering. The actual numbers – more than 20 million people across the 28 EU member states – are mind-numbing.
Social commentators are warning of the dire consequences of the youth unemployment crisis. There is talk of an entire generation's hopes and aspirations being sacrificed. The huge unemployment tolls – and the numbers of young wasted lives that seem likely to be the consequences of long-term and potentially permanent unemployment – are comparable with the tolls of the two wars.
In the countries that now comprise the European Union, an estimated seven million died in WWI and around 20 million died in WWII. In the words of Professor Amable: "The political leaders are failing the young people of Europe."
The EU evolved out of a decision in 1951 of the leaders of the six major European nations to form an economic union - initially called the European Coal and Shipping Community - as a means of removing the causes of both wars: economic upheaval leading to ultranationalism and extreme ideologies. The shared sovereignty, single currency and open borders that are the defining features of today's political order in Europe are, above all else, Europe's insurance against the threat of the return of competitive, and ultimately, militarist nationalism.
The EU is an economic union, but it was created for political and strategic reasons. With more than half century of peace enjoyed since the EU originated, Europeans – at least the generations before the current jobless one – regard the union as a success.
"I have lived my life in peace," a retired German businessman holidaying in Tuscany told me. "I thank the founders of the EU for that."
We recently travelled along a key section of the line of conflict of World War II – the borders of Germany, the Czech Republic, Austria, Switzerland, France and Italy – and experienced one of the striking realities of today's unified Europe.
The only way of telling you have crossed the borders between these countries is when your mobile phone advises you that you have entered a new country, and warns of the danger of the horrendous costs of international roaming.
Only twice were our passports checked – when we landed in Vienna and nearly seven weeks later when we departed from Nice.
You had to look hard to find clues to which country you were in, although there was one striking and poignant clue.
On the side of the victorious Allies, the centenary of the Great War is being marked by memorials and monuments hailing the heroes of both wars, festooned with national colours and often set in beautiful gardens.
In a museum in the Rhône-Alpes regional capital of Chambéry, there is an exhibition which details every single attack by local partisans on the occupying German forces. Similarly across the border in Italy, the operations of anti-fascist partisans are commemorated. Partisans were especially active and effective in the Savoy region, which covers these parts of France and Italy.In search of war memorials
On the side of the defeated Axis powers, it is difficult to find memorials to the war dead. In small towns, there are memorials to soldiers who died in World War I. But it is almost impossible find memorials to the dead of World War II.
There are memorials to patriots who resisted the Nazis. In Bellagio, an elegant, ancient town on the shores of Italy's Lake Como – near where local partisans captured and killed the Italian dictator Benito Mussolini in April, 1945 – there is a monument to Teresio Olivelli, a hero of the local resistance who died in a German concentration camp just before the end of the war.
I did find a monument to World War II soldiers, tucked away in an alcove on the side of a church in a village in the Salzkammergut lakes region of Austria.
It consisted of a plaque with the names of young men of the village who had died in both wars. But an accompanying mural depicted young men, dressed not in military uniforms, but in civilian clothing.
In the nearby city of Salzburg, the most conspicuous World War II memorial is a plaque on the main bridge over the river that divides the city which pays tribute to the builders of the bridge – forced labourers from a Nazi concentration camp.
In the nearby Salzburg Museum, an entire floor is given over to an exhibition which documents the horrors of the two world wars.
The exhibition features the writings of Stefan Zweig, the famous Austrian writer – Wes Anderson's film The Grand Budapest Hotel was inspired by Zweig's life and novellas – who, after initially sympathising with the Central Powers in the early days of World War I, was turned pacifist by what he saw on the battlefields.
Zweig concluded that the only hope of a peaceful Europe was through closer integration and the breaking down of the nation states.
Between the two wars, he wrote prolifically and travelled widely, promoting his belief that Europe had a "soul" and that, by promoting understanding between the different cultures and nationalities of Europe, a European identity would evolve and that this would put an end to nation-state conflict.
But in despair at the rise of Nazism and the German annexation of his own country, Zweig and his wife, who had fled to safety in South America, committed suicide.
Today, Zweig would marvel at the transformation of Europe into a unified, integrated and peaceful place, inside the 28-nation European Union. What he dreamed of, and despaired of ever seeing, has become a reality.
But he would also fret at what he could reasonably conclude, from the recent dismal story of the European economy, is the risk that the achievements of post-World War II Europeans might be beginning to unravel.Fundamental questions about economic prosperity
The crisis in which Europe now finds itself trapped is one which raises fundamental questions about whether the unified entity that was created to end military conflict can ever grow and prosper as an economic entity.
The single currency, which is the boldest manifestation of the desire for a unified future and is now the currency of 18 of the EU's member countries, is facing an existential threat as the price of sustaining it continues to increase.
Professor Amable told me he believes it is impossible for the euro zone economy to perform optimally within the "straitjacket" imposed by Europe's political leaders.
He said there was no foreseeable prospect that Europe's leaders will agree on a set of policies that would lead to the sort of growth rates needed to cut unemployment rates significantly.
However: "They will use every possible option that they can to save the euro. This could go on for decades."
A recently retired French diplomat, whom we met in a café in a village near Grenoble in the Rhône-Alpes region, said he believed Europe's leaders would go to very great lengths to defend the euro.
"Non-Europeans, especially economists, don't understand, when they predict the end of the euro, how powerfully Europe's leaders regard the survival of the euro as an article of faith. They understand that it makes it harder to manage their economies but they see it as something beyond economics."
But a critical question that is yet to be answered – and to which no European political leader knows the answer – is what will be the limits of tolerance among European citizens for an economic system such as that now in place, which is permanently handicapped by the political imperative of preserving the single currency.Human, physical, costs
It's not just the cost in human capital ripping at the social fabric of Europe. The physical fabric – from the big institutions to the public infrastructure – is beginning to look tired and tattered.
Get off the major motorways in what are supposed to be among the wealthiest European countries – France, Italy, Spain – and you find crumbling road surfaces and clogged local roads. Go by local train rather than the sleek and fabulous high-speed inter-city trains, and you find yourself riding in dirty, graffiti-sprayed, ancient rolling stock.
The rail networks are also beginning to shrink as the cost of maintaining services far exceeds the revenue they can raise.
In cities such as industrial Piombino, a major port on Italy's Tuscan coast from which tourist boats travel to Elba (the island on which Napoleon Bonaparte was exiled) and to Sardinia, the local authorities have had to defer plans to brighten and cheer the city's grey and grimy face.
Piombino's major employer – the Lucchini steelworks, Italy's second largest – was put into administration by its then owner, Russia's Severstal, in 2012, after being declared bankrupt.
Indian steel maker J S W Steel offered to buy it for less than $US100 million ($116 million), proposing to restructure it as a processing plant and reducing its 2000-strong workforce by two-thirds. A further 1000 jobs were forecast to be lost in associated industries.
The ownership of Lucchini is still to be settled, as the administrators try to find a better offer but the impact on the city of 40,000 has been devastating. The city's shopping areas are dotted with vacant premises.
Analysts say that steel making is just one example of an industrial sector in decline in Italy. Manufacturing output in Italy has shrunk 25 per cent since the GFC first struck.
Italy has Europe's largest proportion of small and medium enterprises, which were once the backbone of the economy but are now struggling to survive. This story of businesses battling to survive is repeated in each of the euro zone's major economies, except for Germany.
In Italy, France and Spain, the three economies – apart from Germany – on which the hopes of a euro zone recovery depend, businesses struggle under huge tax burdens. In Italy, the tax burden for companies is estimated by the World Bank to be almost 66 per cent. In France it's 64.7 per cent and Spain it's 58.6 per cent. This compares to the EU average of 41 per cent.Regulatory nightmares
Regulatory requirements are a nightmare of tangled national, provincial and local red tape; energy and communications costs are onerous.
Access to finance is another severe handicap for business owners in the troubled euro zone economies. Banks in Italy, France, Spain and Portugal are still struggling to rebuild their balance sheets. The recent European Central Bank "stress tests" for the euro zone banking system found Italy's banks to be the most vulnerable to a severe new financial crisis.
Italy and France have both failed to comply with European Commission rules for their forthcoming budgets but , with recession and the threat of deflation hanging over both economies, they have been allowed extra time to come within the limits for spending and deficits.
But only on the condition they make bigger cuts and introduce bolder reforms to improve the efficiency of their economies.
Professor Amable says he believes the European system of "social democratic capitalism" is beginning to unravel. He predicts Europe will gradually move away from "its unique form of capitalism" to a purer, American form of capitalism.
Protests from the left at such changes are becoming louder. In Italy, communists are again drawing crowds of angry workers. But it is the anti-euro political movements which appear to be gaining most strength, fed by disillusionment with rising unemployment and open borders that are allowing big internal population flows as job seekers leave poorer economies and head for richer ones.
In the United Kingdom, the anti-EU, anti-immigration UK Independence Party (UKIP) has just won its first seat in Westminster. A second appears to be theirs for the taking at the forthcoming by-election in Rochester, Kent, on November 20.
In Hungary, a hard-right government is reviving fears of rising anti-Semitism. Across the unemployment-ravaged southern European nations of Spain, Portugal, Italy and Greece, right-wing populists are on the rise.Ugly echoes of the past
Echoes of the ugly nationalism of the past are becoming louder: on the EU's eastern border, blood is again flowing as Ukraine is ripped and torn by conflict between Ukrainian and pro-Russian nationalists. Russian President Vladimir Putin is beginning to sound like a Cold War warrior.
Even in Germany, the economy of which is the foundation stone of the euro zone, stresses are emerging. An anti-euro party (the AfD or Alternative for Germany) has, for the first time, made significant gains in state elections.
Germany is deeply conflicted about the role it should now play in Europe, its judgement about how it should act being coloured by both its own memories of its past and the memories of other Europeans.
A German diplomat told me: "When I am in a meeting with my colleagues from other European states, I am very reluctant to be seen to be too aggressive or assertive. Our history makes it difficult to be seen to tell others what we think is good for them."
This is a national characteristic of Germany in the early part of the 21st century.
Germany's post-war economic miracle has restored it to be the economic power-house of Europe. What happens in Germany, the economic policy decisions it makes, reverberate throughout the rest of the euro zone.
But Germany's economic policies are being powerfully influenced by its history and the role that hyper-inflation in the aftermath of World War I played in the rise of Adolf Hitler and Nazism and the uber-nationalism that powered them.
Vigilance against rising inflation is the sacred duty of Germany's political leaders and economic policymakers. Nothing that might allow the inflationary genie out of the bottle is allowed. Austerity rules, even when growth is weak.
In its domestic economic policies, and within the policy forums of the euro zone, and despite the continuing weakness in the euro zone economy, Germany has held the line against stimulatory measures.
Critics complain that Germany's fear of its own history has become a selfish indulgence and amounts to a failure of leadership
They blame Germany's anti-inflation "obsession" for intensifying the damaging consequences of the global financial crisis and thus contributing to the creation of a jobless generation of young Europeans.
They implore Germany's leaders to take a wider view of their responsibility to the rest of Europe and to accept that Europe needs to adopt more expansionary economic policies and relax the German inflation "phobia".
It is an historic irony that, more than half a century after Europe began to unify as a means of ensuring Germany never again became the dominant power, Germany is now being criticised for failing to use its economic and political muscle to help lift Europe out of its economic troubles.
One of Europe's most respected economic commentators, Martin Wolf of the Financial Times wrote recently: "At Berlin's insistence, the euro zone has turned into a battleground for meagre scraps of demand, under the rubric of 'competitiveness'.
"This inability by German policymakers to move beyond the intellectual framework of a small, open economy to a continental one is a tragedy."
But German leaders argue this is a criticism that ignores the reality of German domestic politics.
Professor Norbert Lammert, President of the German Parliament, who has just visited Australia ahead of the official visit by German Chancellor Angela Merkel, told me there was overwhelming domestic opposition to Germany becoming "the leader of Europe".
He said the idea would also be rejected by German's key European partners. "Memories of the results of German assertiveness in the past are still very strong." He added that there was no consensus on how to revive growth in the euro zone.
One strong view, which Germany advocated, was that the prerequisite for growth was fiscal stability which came from balanced budgets, low debt and a central bank with its role limited to setting interest rates. The other, advocated by France and Italy, was that fiscal stability would only come once growth had returned, and all the levers of policy should be used to create growth.
The inability of leaders and policymakers to revive the major economies of the euro zone seven years after the first shockwaves of the global financial crisis hit is now beginning to open a generational divide over the worth of the entire European project.
Older Europeans remain deeply committed to the idea of the EU as the guarantor of Europe's peace and security. But young French, Italian, Spanish and Greeks facing long-term and potential life-long unemployment are becoming increasingly disillusioned. Says Jacopo, the young Italian waiter thinking of following friends who have headed to Australia in search of jobs: "I am angry with those [European] leaders. They don't care about us. They are like [former Italian prime minister Silvio] Berlusconi. They only care about themselves."
It is a sentiment often voiced by young Europeans.
Indeed, the conversation about Europe's problems seems full of disconnections.
As Europe reflects on the centenary of the beginning of World War I and the peace of the past 70 years, the pro-unification consensus between the leaders and the voters on which the European Union was built is under pressure.
The great reward of European unity – the post-war generations living in peace – is losing its appeal as workers, especially the young, face the fear of lives wrecked by the uncertainty and insecurity of a parlous employment outlook.
Beggar-thy-neighbour thinking, which Adam Smith first identified as the cause of much suffering, is reviving as nationalistic anger grows about the portrayal of poorly performing member states shipping their problems to their neighbours.
This is most obvious in the UK, where anti-foreigner sentiment is powering the rise of the populist right wing UKIP Independence Party.
The possibility that the UK would pull out of the EU if there was a referendum on the issue – if the Conservative Party wins a majority in the 2015 general election, it is vowing to hold a referendum in 2017 – is now quite real.
The major issue feeding anti-European sentiment is the flood of jobseekers from the continent heading for the UK.
With British economic growth now outstripping the euro zone and with unemployment rates substantially below those in the euro zone, the UK has become an attractive destination for both young Europeans and also for the rising tide of economic refugees from beyond Europe's borders.
While UKIP uses fear of foreigners to win public support for its questionable policies, quite sensible and rational critics are arguing that the fact the British economy is now doing well while the euro zone is doing poorly proves that, not only was Britain wise not to sign up to the single currency, but the evidence is now clear that the euro is a failure.
In Europe, the widening gap between Britain's economic recovery and the euro zone's continuing malaise is boosting anti-euro sentiment.
The idea that the euro was a political experiment which would be economically unviable is gaining strength.
While Brussels-based officials play down the likelihood of Britain voting to leave the EU – though suggesting sotto voce that without Britain's recalcitrance it will be easier to manage the union's decision-making processes – there is clearly unease about a possible UK referendum on the matter.Bid to keep Britain
"It would be the most serious setback for Europe since the creation of the EU," a Brussels-based official conceded.
"The EU needs Britain. Its long history of democracy and the rule of law make it a vital member of the union. A decision in London to leave the union would have very serious consequences for Europe."
The internal people movements now occurring in Europe are taking place according to the original concept of the single European economy. Free movement within the borders of the EU is one of the four founding principles of the union.
Asked how he felt about young people from southern Europe arriving in Germany to seek the jobs they could not find in their own countries, the German businessman we spoke to in Tuscany said: "That's OK. We are all Europeans."
But fewer people are making such statements. In 2012 (the latest available figures), more than 600,000 citizens from other EU countries moved to Germany. The UK had more than 500,000. An estimated half a million Hungarian citizens have moved to the wealthier EU countries since 2010.
Some estimates suggest that more than 100,000 young Italians have left Italy in search of work in the past year. Even Spanish, Portuguese and Greek young job seekers have left to join the job search in other EU member states.
Travel through villages off the tourist trail in these countries and it's hard to find any young people. On top of the internal people movements are big numbers of economic migrants from outside the EU, especially from northern Africa and the Middle East, many arriving by unseaworthy boats crossing the Mediterranean.
Young Italians told us that they were proud of the humane way in which the Italian authorities had gone to the aid of more than 150,000 boat people heading to Italian shores. But late last week, the Italian government announced it was shutting down its "Our Sea"(Mare Nostrum) mission because of the cost, and that it will be replaced by an EU scheme.
And several times on trains crossing national borders, we saw heavily armed police going from carriage to carriage checking potential hiding places for illegal immigrants trying to make their way without travel documents to places where they could find work.
Many of those seeking to make this journey are Muslims, escaping the conflicts in their own countries, a traffic that is feeding anti-Islamic sentiment.
There are increasingly strident calls for national governments to reintroduce border controls, both to their own workers from foreigners coming in and taking their jobs but also to increase security against extremists.Growing pressure
Europe's political leaders are now under growing pressure to wind back the "open borders" policy, even though this would be a major setback for the single market and a concession that the project is in trouble.
While any admission from those working to solve the economic crisis that the project is economically flawed would be heresy, there are plenty of voices warning of the dire consequences of a collapse of the euro and a break-up of the union.
Key figures in Europe are using the centenary of World War I to remind their populations of the horrors that gripped Europe for the half-century before the creation of the European Union and that the reasons for creating the union are no less compelling now than they were at its inception.
German foreign minister Frank-Walter Steinmeier has called for Europe to use the centenary, and the dark history of which it reminds Europeans, as an historic moment to commit to rebuilding the union, a call that implicitly accepts that the union is in serious need of repair.
Professor Lammert said that, while he believed it was impossible for the EU to cease to exist, he had to concede that there were still big questions to be answered about the viability of a system which has nation states devolving their sovereignty – especially in the form of their national currencies – to a central body which was not a government. So the European project was still a work in progress, he said. But its progress is now being measured in fractions.
In Italy and France, the economies are going backwards, and in Spain, Portugal and Greece, forward movement follows huge losses of wealth.
What is extraordinary about all of this, when you think about it, is that the citizens of Europe are living inside what is a huge economic experiment.
The euro breaks fundamental rules of economics, in the pursuit of a laudable political goal – permanent peace.
Of course, the same can be said of China, where the Communist Party has fused autocratic, one-party rule and minimal political rights with the capitalist economic model. But China is growing and the Chinese are enjoying economic freedoms while apparently content, for the foreseeable future, to be denied political liberty.Little to show for shift
After seven decades of peace, Europeans have gained much from European unity and a single market. But a decade after its creation, they have little to show for the shift to a single currency.
While they are able to freely express their political will, the divestment of national sovereignty to the European Commission and the European Central Bank – neither of which are subject to the will of the voters – has circumscribed that freedom.
As Europe remembers the centenary of the outbreak of World War I – and marks the 25th anniversary of the fall of the Berlin Wall on November 9 – and leaders reaffirm their commitment to never again allow the mass annihilation of its people, the economic reality of a peaceful Europe is a sober one.
As a measure of European progress, mass unemployment and the misery it is causing are a heavy price for the people to pay for the peace.
And, at best, Europeans can expect only a long and slow journey to the prosperity which the current crisis has so cruelly delayed. The wars between Europe's major powers may be over but a long economic struggle is ahead.
In a coffee shop, in the village of San Giovanni, which can trace its origins back to Roman times when Lake Como first became a summer playground for the elites of Europe, shop assistant Gaia happily tells us she had not long returned from working in Australia, picking pineapples in Queensland. She earned enough money to buy a campervan and drive around Australia.
She says family ties drew her back to Italy and she intends to stay, even though work she can find is piecemeal and does not pay well.
She is thankful to be living in a peaceful Europe. But she and others of her generation resent the fact that the current generation of political leaders appear to be making such a harsh of converting peace into prosperity.
I recall when living in Europe in the mid-1990s that often when you spoke to young people and asked them their nationality, they would reply: "I am European." I didn't hear that once this time. The hope and optimism of that 1990s generation is giving way to frustration and disillusionment.
Unlike a century ago, the prospects of leadership failure leading to continental war are low. But people's lives can just as easily be destroyed by economic mismanagement as political failure and war.
As they mark important and sombre anniversaries, there is much for European leaders to contemplate about the challenges they now face.
But Gaia has no expectation that things will improve in the foreseeable future. "I have no confidence in the politicians. None of my friends do either. There is no-one worth voting for in Italy."
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