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Euro zone economy real recovery or another Sirens song

Over the years, euro zone economic growth has been a bit like the Sirens in Homer's Odyssey: singing a song of promise, only to end up pulling you onto the rocks. Will it be different this time?The strong growth registered in numerous data releases and surveys at the beginning of this year has surprised many. One eye-opening example was the release of flash purchasing managers indices for France, Germany and the euro zone on Feb 21. Of nine indexes, eight registered growth and six did so at a higher level than any economist polled by Reuters had imagined. Not surprisingly, economists and policy-makers are now looking for firm proof that the euro zone's apparent rebound this year is sustainable, as well as noting a variety of potentially destructive economic and political hazards ahead. There has not been, they say, a specific inflexion point at which it can be said that the euro zone has recovered and is off on a growth tear. Rather it has been a slow simmer."The euro zone has been recovering steadily for three years now, helped by monetary policy stimulus, an end to fiscal austerity and a healthier financial sector," said James McCann, OECD economist at Standard Life Investments."(It's) a steady recovery which has been trundling on."The numbers confirm this. The European Commission notes that real GDP in the euro zone has grown for 15 consecutive quarters - a sign of steady improvement. But putting aside some of the latest data, it has been steady rather than spectacular. Economic growth is still running at only around 1.6 percent annually, and most forecasters - from economists polled by Reuters to the Commission itself, reckon it will be about the same this year. So the question is whether the recent data has turned this on its head. Even before considering whether Greece's debt problems will come back to bite the euro zone, there are two main strands: inflation and elections.

OF POLITICS AND INFLATION While the repetition of positive January and February data in the month ahead - for example, German industrial orders soaring again - would fuel the euro zone takeoff story, inflation may hold the key."The risk of disappointment is that higher headline inflation decelerates real income growth and consumption," said Paul Mortimer-Lee, global head of market economics at BNP Paribas. The preliminary reading of February euro zone inflation, to be reported on Wednesday, is expected to come in at 2.0 percent year-on-year, rising to the European Central Bank's target on the back of monetary stimulus and economic growth. While far from hyper, such a level has not been seen for four years, and there has been a strong inverse path taken between inflation and retail sales over the last five years.

In other words, rising prices can hurt consumer spending, which in turn drives economies. Unemployment during the financial crisis accounts for some of the dive in retail sales seen on and off since 2008. But joblessness, though improved, is still twice that of, say, the United States. So if euro zone inflation were to overshoot in the coming year, it may well stifle the very growth that engendered it. Economists, however, also see a growth killer in the bloc's politics. Many have long argued that the euro zone cannot compete as a leading economy without substantial structural reform - particularly in the number two and three economies after Germany.

"It comes down to France and Italy stepping up a gear," said Florian Hense, European economist at Berenberg private bank. But it is exactly in those two countries where politics is threatening to delay or derail the type of pro-growth structural reforms advocated by the European Central Bank and many private sector economists. In Italy, the chances of an election this year have diminished, but the political turmoil surrounding the resignation of prime minister Matteo Renzi is likely to set back major reforms until an election takes place. It is France, however, that is seen providing the biggest risk. Two of the top three candidates are viewed as economic reformists, but they are up against Marine Le Pen, the far-right National Front candidate whose pledge to put France's EU membership to a referendum could de-stabilize the region's economy for years. Le Pen is not supposed to win, according to polls. But neither was U.S. President Donald Trump or those in Britain wanting to leave the Europe Union."If a rising France joins a still strong Germany at the core of Europe, the economic and political outlook for the euro zone as a whole could improve considerably," Berenberg economists told clients."(But) a President Le Pen would spell the end of reform hopes for France and the EU for the next five years."Click for graphic on Euro zone economy.

GM shifts from bigger is better to less global, more profitable

General Motors Co’s (GM. N) decision to sell its European operations doubles down on a bet that the company can win by being less global, but more profitable, in an auto industry increasingly driven by software. Without the German Opel and British Vauxhall brands, GM last year would have sold about 8.8 million vehicles -- well behind Germany's Volkswagen AG (VOWG_p. DE) and Japan's Toyota Motor Corp (7203. T) in the race to be the world's largest automaker by vehicle sales. Opel and Vauxhall combined sold nearly 1.2 million vehicles in 2016, and generated $18.7 billion in revenue, about 11 percent of GM's total. However, all of GM's activity in Europe - the investments in new model designs and cleaner engines, the efforts to make factories more efficient and the wages paid to 38,000 employees - has generated nothing but losses since 1999. Meanwhile, GM's business in North America has boomed. GM's home market operations were reborn as a smaller company due in part to the U.S. government led bankruptcy in 2009, with fewer brands, fewer dealers, fewer employees and far less money owed to creditors and retirees. Since 2009, cheap gasoline has powered a boom in sales of high-profit pickup trucks and sport utility vehicles, lifting GM's North American pre-tax profit margins to just over 10 percent in 2016. To keep its North American profit machine revved up, GM will have to invest in new SUVs and trucks, as well as expensive technology to enable those trucks to meet rising federal fuel economy targets. Europe is demanding cleaner cars, too. But far less of the technology GM would buy to clean up European diesels and tiny gasoline engines would be useful in the United States, where larger gasoline engines – including eight cylinder motors used in pickup trucks – dominate the market.

GM has concluded that it cannot achieve significant economies of scale in emissions technology for Europe on its own, company executives said. Peugeot Chief Executive Carlos Tavares is wagering that he now can gain an advantage against rivals such as Renault SA and Volkswagen AG with the help of the added revenue and sales volume provided by Opel. France's PSA Group (PEUP. PA), the maker of Peugeot, Citroen and DS cars, announced a deal to buy GM's Opel division on Monday. GM's decision to walk away from Western Europe highlights two other profound shifts since 2009, when GM's board scuttled a deal to sell Opel and Vauxhall to a group led by auto supplier Magna International (MG. TO) and Russia's Sberbank. The first is China, now the world's largest auto market with roughly 28 million vehicles sold in 2016, and more growth forecast to come.

As China grows, GM will need to shift more vehicle engineering money and capital investment to feed that market - which could eventually replace much of the global sales volume sacrificed by the sale of Opel to Peugeot SA(PEUP. PA). GM's Buick brand, its primary brand in China, and the Wuling brand of small commercial vehicles GM builds with partner Shanghai Automotive Industry Corp, each outsold Opel and Vauxhall in 2016. The second factor is the race to transform cars into electrified, intelligent devices that are paid for by the mile instead of purchased on installment plans. Asked last month whether GM needed more radical restructuring to lift its share price, GM Chief Executive Mary Barra pointed to "the way that we are investing in the future, which I think is a huge opportunity, with transportation-as-a-service," and to "the opportunity that technology has to transform this industry" as factors that could change how the company is valued.

However, investors have not changed their views yet. Gary Silberg, head of KPMG's [KPMG. UL] Americas automotive practice, said that when it comes to the digital systems and the people required to collect, analyze and manipulate the terabytes of data required to make a car drive itself, Silicon Valley companies such as Alphabet Inc