Moment of Truth May Be Here for Europe
US markets ended in negative territory today. Most of the action was attributable to a disappointing result from the latest “Merkozy” meeting. No Eurobond program was announced; not even an expansion of the EFSF. Instead, they called for Eurozone nations to enact balanced-budget constitutional amendments as well as the formation of a “new economic government”, to be completed by summer 2012. On the prospect of Eurobonds Sarkozy stated: “One day we could imagine them, but at the end of a process of European integration, not at the beginning”. The prospect of Eurobonds, seen by many, as the only solution to stop contagion seems to be far off. Eurozone officials are woefully behind the curve in my view.
The recent slowing in core-countries such as France and Germany (not to mention contraction in most peripheral countries), makes the current situation even more dangerous. If Eurozone economies (especially France and Germany) were expanding smartly, perhaps investors would have more patience and accept piece-meal steps like the ones discussed today. Unfortunately they are not; French GDP growth stalled while German GDP only grew at a 0.1% in the second quarter. Confidence is dangerously fragile. What happens if the market doesn’t have the patience to move at “political speed” anymore? Today Art Cashin, Head UBS Trader, said that Europe’s wolfs may circle the markets tomorrow morning. If European markets have an ugly day tomorrow, it would signal that investors have had enough of the can-kicking and want results now. I don’t think the EU would be able to provide them in time due to a myriad of legal hoops and bureaucratic steps ALL European governments would have to go through. The political will of the people is increasingly not in favor of continuing the madness either.
The global economy is walking on thin ice and I can hear cracks.