REUTERS SUMMIT-Economic strength, Franco-German harmony inure markets to euro zone politics

* Fund managers upbeat on 2018 euro zone outlook

* Say both politics and economics have surprised this year

* Hopeful for Macron's reform efforts

* Positive on euro, tighter bond-yield spreads

* For other news from Reuters Global Investment Outlook Summit:

* http://www.reuters.com/summit/Investment18

By Dhara Ranasinghe

LONDON, Nov 17 (Reuters) - The best economic growth in a decade and a tightening of the Franco-German axis at the heart of the 19-member euro zone has de-sensitized markets to European political risks and will keep money flowing into the bloc in 2018, top investors said this week.

Euro zone investments have turned in one of their best years since the single currency was born in 1999, astonishing many who had bet on the bloc to be a potential disaster play this year in the face of several key elections and the perceived rise of anti-euro populism.

For the asset managers attending the Reuters 2018 Global Investment Outlook Summit, there were two key reasons for the brighter investment outlook in the euro area -- long the laggard of the world economy.

The first has been the unexpectedly brisk pickup in consumer and business confidence and an economy expanding at its fastest rate since before the global credit bust and banking collapse of 10 years ago. Second, and a significant driver of that growth, was a turnaround in the bloc's political fortunes after the French and Dutch elections early in the year.

Views were divided on the effect of Brexit: some suggested it may have had the unexpected effect of binding the euro zone together more tightly, while others reckoned the full force of Britain's exit from the European Union was yet to be felt on both sides of the Channel.

But overall, the political mood and economic backdrop has radically changed on the European continent moving into early 2018 and investors say they are much happier to look through risks that seemed so daunting only a year ago.

As a result, many said any volatility around Italy's elections next year or Catalonia's new regional poll and ongoing push on secession from Spain, for example, would merely provide better buying opportunities as neither constituted systemic threats to the zone in the current environment.

"We see a dissipation of a lot of those political risks that people were worried about at the beginning of the year, particularly centred around the French election," Peter Fitzgerald, head of multi-assets at Aviva Investors, said in London on Thursday.

"You have for the first time in almost a decade a functioning Franco-German axis, which is fundamental to integration in Europe," he said, adding positive factors from further integration had been underestimated.

The election of pro-European centrist Emmanuel Macron as French President in May put fears about the euro zone's future to rest. Dutch and German elections also passed with no major turbulence.

Euro zone break-up worries were front and centre for investors at the start of 2017 as anti-euro French presidential candidate Marine Le Pen (Other OTC: PENC - news) looked to capitalise on the anti-establishment wave that led to the Brexit vote and the election of U.S. President Donald Trump last year.

"If you would ask me over a year ago today, my biggest surprise would be the Macron election, (it) truly had a meaningful impact on the psyche of Europe," Larry Fink, CEO and Chairman at BlackRock (Sao Paolo: BLAK34.SA - news) , with assets under management nearing $6 trillion, said in New York.

Fund managers told the summit they were hopeful for Macron's reform agenda and were watching this closely.

In September, Macron formally signed five decrees overhauling France's labor rules, the first major economic reforms since he took power.

Those reforms, robust growth and an extension of European Central Bank monetary stimulus have pushed the premium investors demand for holding French debt over top-rated German peers to its lowest in 2-12 years.

The bond yield spread between Germany and lower-rated southern European issuers has also been squeezed, getting an additional boost from ratings upgrades in Portugal and Italy.

Nick Gartside, JP Morgan Asset Management's international chief investment officer, believed there was no reason why the Italian/German bond yield gap could not get down to the low 100 basis points area. It was at 144 bps on Friday.

Political stability at the heart of Europe has allowed investors to focus on stronger economic growth and better corporate earnings.

The euro zone economy grew 2.5 percent year-on-year in the third quarter, outstripping U.S. economic growth in the same period and setting up 2017 as the best year for the currency area since financial markets crashed a decade ago.

"We are enjoying, and it's likely to stay moving into next year, a cyclical sweet spot with a broadening of the recovery across the euro zone including Italy and with an important component coming from internal demand," said Pascal Blanque, who oversees 1.4 trillion euros ($1.65 trillion) at Amundi (Berlin: 350155.BE - news) .

The euro has racked up gains of almost 13 percent against the dollar this year, making its this year's best performing major currency. European share markets are up over 20 percent so far in 2017.

"The credit outlook is good, our book is strong. We are comfortable with equity markets," Mark Konyn, CIO of insurer AIA (HKSE: 1299-OL.HK - news) Group, said in Hong Kong this week. "Even (Taiwan OTC: 6436.TWO - news) if there is a pull back in equities, there is a tremendous amount of cash that is waiting to be deployed."

(Additional reporting by Jennifer Ablan in New York, Marius Zaharia in Hong Kong, Ritvik Carvalho and Helen Reid in London; Editing by Toby Chopra)