Financial markets in Europe have been a sea of tranquility since last summer. The ECB and Mario Draghi’s promise for unlimited interventions began another quieting period that suppressed bond spreads that has led to the premature “euro crisis is over” sentiment. During that time, the Greek settlement (or third default) on December 10 seemed to have abated the heavy pressure of currency hedging as bond yields began to move in the core (Swiss rates, for example, finally began to peak above 0%).

In the European real economy, however, it has been the exact opposite. Spanish industrial production fell 6.9% in December, a massive 8.5% year-over-year plunge. Unemployment in the country is now entrenched over 26% and still rising, accompanying (causing?) a parabolic rise to record levels of nonperforming loans at Spanish banks, but financial markets do not echo economies in the ECB’s world.

In fact, industrial production had no bright spots anywhere in Europe. In Germany, industrial output is now at its lowest point since 2009, falling sharply in Q4 (where GDP “unexpectedly” contracted). In France, a country with a far less robust rebound in industry, industrial production has fallen to a level first seen in 1997.

I wrote some time ago that there was both an inherent contradiction and conflict between success in the European financial sphere and the real. Shoring up the financial system meant pushing the euro upward, signaling strength that the end of the common currency was far from nigh. To reassure the financial economy meant a concerted effort to raise the price of the euro – the falling euro was the visible sign of growing fear bordering on a currency run. Successfully ending that potential run, of course, in the current environment of currency competition, meant quite the opposite in the export-heavy “core”; thus explaining some proportion of the recent German industrial adversity.

Talk out of German and French politicians in the past few days, indeed including Draghi himself at the ECB press conference this morning, has been in that direction. Complaints about the euro “strength” have been moving proportionally with the actual currency price. French President Hollande actually said today that,

“The euro should not fluctuate according to the mood of the markets. A monetary zone must have an exchange rate policy. If not it will be subjected to an exchange rate that does not reflect the real state of the economy.”

It’s not fully clear from his statement (but we can reasonably assume) that President Hollande understood the irony of decrying a euro that potentially does not reflect the “real state of the economy”. There is little doubt that markets are more attuned to the mood of the central bankers than Spanish, French or German industrial production.

He was correct in noting that, “Europe is leaving the euro vulnerable to irrational movements in one direction or the other.” However, he did not finish that thought by pinpointing the source of irrationality as Frankfurt. There have been only vague overtures toward the Bank of Japan and the Yen, without following the logical train toward what consequences there might be if everyone seeks to devalue at the same time; due to the same exact economic weakness (supposedly demand rather than oversupply).

In this contest of the financial vs. real economies, we can start to piece together what seems to be the next phase – and here we have ample history in just the past three years. Far from an end to the euro crisis, if the real economy is to gain control in the internal struggle, we might expect a re-flaring of currency risk and financial pressures. Swiss bond rates are back close to zero again, and, for the first time in six months, Spanish sovereign debt auctions failed to reduce interest costs. Though bids were plentiful, the €4.6 billion sale across three maturities saw average yields rise about 50 basis points over the previous auction of only four weeks ago. That has brought yields back up to mid-December levels, almost erasing all of the price action from after the Greek settlement.

Part of the uncertainty in Spain is no doubt related to growing political turmoil, but with the coincident drop in the euro indicating a much broader trend perhaps emerging, the turn in auction prices is, to me, potential very significant. For American investors this is all the more important as US stock prices have been highly correlated in the same direction as the euro (European banks and their dollar assets). If nothing else, stock prices in Europe (generally) are now showing losses for the year as investors finally begin to re-assess exactly what was accomplished (or not) in 2012.