Gross domestic product — Third quarter GDP was up 0.7 percent and 2.7 percent when compared with the same quarter a year ago after a somewhat disappointing second quarter. Private consumption led the way with an increase of 0.5 percent and 1.6 percent on the year which was supported by a 0.9 percent quarterly gain in fixed capital formation, a 0.6 percent rise in government consumption and a 2.5 percent advance by exports. Aggregate domestic demand was up 0.8 percent but net trade made a small negative impact as imports increased by 2.7 percent.

Germany continued its leadership role in the third quarter, growing at a 0.7 percent on the quarter and 2.5 percent on the year pace. French GDP rebounded and was up 0.7 percent on the quarter and 2.1 percent on the year. Italy lagged with growth edging up 0.4 percent on the quarter and 1.9 percent on the year.

Industrial production — Most analysts readily acknowledge that the economy will not function to its fullest potential unless serious structural reforms are undertaken in the labor markets and the financial markets. For example, the industrial sector is the most dominant for the larger countries and the sector is embedded with labor rigidities that present a formidable challenge. Benefits cut backs are not politically expedient. For example, it is difficult to fire employees or to cut back in times of weak growth without paying exorbitant severance and ongoing jobless benefits. These can be so lucrative that the incentive to find another job is non-existent.

Inflation — As measured by the harmonized index of consumer prices, inflation has soared above the ECB’s two percent inflation ceiling. While core has remained below or close to the ECB’s 2 percent target, the HICP spiked to 3 percent according to the November flash reading. EMU countries were hit hard by spiking energy prices. But the steady increase in the core HICP has many at the ECB concerned about underlying inflation. The ECB’s mandate as stated in the Maastricht Treaty that established the Bank is inflation control. This has been interpreted to mean that inflation control has a priority over encouraging growth.

Unemployment — Unemployment fluctuated between 8.7 percent and 9 percent during 2004 and in 2005. However, it has been steadily declining since the summer of 2005. October unemployment rate dipped to 7.2 percent.

Europe’s unemployment rate has been stubbornly high because of labor market rigidities, which make it difficult for employers to lay workers off when business growth weakens. These limitations don’t allow business to function with the flexibility that U.S. firms have and reduce costs rapidly in times of slowing growth.

Merchandise trade — Trade plays an important role in European growth. German and Italian manufacturing sectors especially benefited from the weaker euro and it allowed them to sell their products overseas at reduced prices. Foreign trade has been a major contributor to revived economic growth, especially in Germany where consumer spending tends to lag.