We are up over 250 points right off the open this morning, after a very volatile week to-date, with stocks gaining about 420 points on the Dow Monday and Tuesday, and then giving back 180 yesterday. What does this mean? Well, if we look at the apparent progress of the EU with regard to increasing the scope and size of the European bailout, it would appear that we could be turning the corner with the crisis. If a viable plan is set in motion and the financial markets gain confidence that the various EU member countries providing the funding will pay, and those in trouble will stick to their austerity measures, this could be a short-term bottom for stocks, both here and abroad. I would like to believe that we can put the crisis behind us and get back to focusing on domestic issues, like unemployment and U.S. economic growth, which are still major concerns. However, I have heard estimates as high as $2 trillion to fix what is broken across Europe, and candidly, they don’t have the money. My sense of this is that they are all posturing and stalling, hoping we will feel enough pain that we will find is less expensive to step in and pay the bill. The problem is that we don’t have the money! We can’t even pay for our own problems, much less bailout all of Europe.
We already are the largest contributor to the IMF, which is a key contributor to the EU bailout already, so indirectly we are already sending Europe a ton of cash. We are also providing swaps for euros to dollars, to help provide liquidity, which costs us money also.
To me, this is a game of musical chairs, or hot potato… the music has stopped, and there are not enough chairs. The potato has been passed from Greece, Ireland, Spain, and Portugal, to Germany and France, to the IMF (us) and back to Europe. At some point we have to accept that there is not enough money to go around.
If Greece ultimately defaults, I feel there is a strong likelihood that the EU will fall apart and the euro as a currency will be dead. German is really the key – they have to decide if they are willing to take the bad with the good. Germany can’t simply generate a reported 60% of total GDP from the EU countries, but then when there are problems, not contribute significantly to the solution. So far they appear to be (reluctantly) participating in the bailout. But, in the long-run, they are the key to Europe’s recovery, and if they are unwilling to stick it out, like dominoes, the EU countries with financial problems will default, one by one, and the euro and EU will fall apart. We have our own serious problem, so it is up to Germany to do whatever it takes.