Since the EU had been a growth laggard due to the European sovereign debt crisis, the pickup in growth there is encouraging. In particular, Italy deserves mention as it has lagged and is where I believe the battle for the EU’s future will be won. Some thoughts below

At the end of October, I said I would catalogue exactly how the global economy had picked up steam and how this underpinned growth in the US. The figures out of Europe are a major factor here as the EU represents almost a quarter of the global economy. Eurostat, the European Union statistics office, announced that preliminary figures showed euro zone gross domestic product growing 0.6% from July to September, which is 2.5% than the year ago period. Not only is this the highest growth in the Eurozone in a decade, it is also means that Europe is now growing faster than the United States, where year-on-year numbers are 2.3%.

While the highlight in the figures released today came from Germany, EU’s largest economy, given robust 0.8% growth in the third quarter, the real standouts are Italy and France. France and Italy both grew 0.5% on the quarter, with France registering 2.2% in the year and Italy 1.8% in annual growth. These are important markers because Italy only averted a bailout during the sovereign debt crisis due to the intervention of the ECB and because France is where the EU’s reform agenda will live or die due to Emmanuel Macron’s election.

Italy’s banking sector is still struggling with non-performing loans and low levels of capital. The country needs growth to give banks time to recapitalize and to reduce the size of the government’s debt relative to the economy. The worst case scenario for Italy is still one in which a global recession occurs before the banks have been recapitalized and the Italian state is forced to bail in investors and bail out banks after the bail-in money proves inadequate. The combination of Italian saver losses due to the bail-ins and the likely spike in Italian interest rates due to the fiscal burden of bailouts would radicalize politics in a country that is too big to fail. The Eurozone cannot survive with Italy in crisis. The faster Italy grows and the longer this business cycle lasts, the less likely worst case outcomes become.