As Markets Plummet Today, What's the Endgame in Europe?

The two-day summit between European leaders began today. While there's no silver bullet to solve the problems in Europe, there are a number of solutions that could lessen the intensity of the storm surrounding the continent. Let's take a look at what options are on the table and how it could affect the eurozone going forward.

The near-term problems
The crisis in Europe springs from long-term structural flaws, but there are looming short-term concerns that are causing leaders to take quick action. With lending rates on Spanish 10-year bonds moving over 7% and Italy's own rates not far behind, leaders need to quell fears about euro stability before both of those massive economies are unable to continue financing their debt. That time might have already come for Spain, which recently requested a bailout.

Legendary investor George Soros declared earlier this month that Europe has only a three-month window to fix its problems. At the summit this week, a number of proposals will be floated on how leaders see those fixes happening.

Germans acquiesce?
The central figure in any plan to reform the eurozone is Germany. The country underwent its own harsh period of austerity early in the last decade and has been loath to put its own finances on the line to support its weaker neighbors to the south.

However, on the eve of today's summit, German Finance Minister Wolfgang Schauble told The Wall Street Journal his country would agree to debt mutualization, but only if a "common fiscal policy would be irreversible and well-coordinated."

Those comments briefly heartened markets in Europe as the FTSE 100 (INDEX: ^FTSE  ) shot up upon their publication. However, given a bit more time to digest the meaning, markets in Europe quickly resumed their downward slide. Near the end of its trading day the FTSE is down 1.52% while the German DAX is off 2%.

Still a long road
Those German comments might open the door to the kind of structural reforms which could quell panic in Europe. Unlike the United States, where a large trading zone has a federal authority, each country in Europe is "on its own" when it comes to raising debt. Debt mutualization could take on many forms, but the central idea would be that better off countries like Germany would provide backing to countries like Spain, which in turn would reduce interest rates as investor fear of sovereign default decreased.

Such a change would be enormous in continuing to interconnect different European countries. While it might sound like a raw deal to a country like Germany,which has managed its own fiscal situation in a far better fashion, the alternative of letting the eurozone collapse would cause great pain to Germany's export-driven economy. Germany's position looks untenable in either case, but the fear of the greater unknown if inaction continues is driving Germany to discuss more radical plans for the eurozone.

Still, the key is that Germany is looking for a fiscal policy that's not only irreversible, but well-coordinated. Any German plan is still likely a long way off from reaching conditions Italy and Spain would agree on. Such a process of negotiation is likely to take time, and that's a luxury the eurozone now lacks. Such is the reason for continuing declines in Europe today, even if there's glimmers of hope a resolution can be reached.

The home front
Looking back to America, the key focus today was the Supreme Court upholding Obama's sweeping health-care law. The market moved slightly south in the wake of that decision, though weakness is broad and far outside the health-care sector. Overall, the Dow Jones (INDEX: ^DJI  ) is down 1.17% as of 11:20 a.m. EDT. All 30 components are negative, with JPMorgan (NYSE: JPM  ) leading the losers after The New York Times revealed the company's trading losses could be upward of $9 billion, a figure far larger than the $2 billion in losses the company initially claimed. Also seeing big losses today is the technology space, especially companies with larger euro exposure. Intel (Nasdaq: INTC  ) is down 2.4%, leading all tech losers.

Looking to the S&P 500 (INDEX: ^GSPC  ) , the index is down 1.28%. Not surprisingly, losers are concentrated in the insurance and health-care space, with WellPoint and Aetna seeing the largest losses.

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Read/Post Comments (3) | Recommend This Article (12)

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  • Report this Comment On June 28, 2012, at 1:10 PM, rav55 wrote:

    The European Common Market is a big lie. One thing that it is NOT is a Common Market. As soon as the retarded (screw being politically correct) economies such as Greece and Portugal joined, the gained equity that they were not entitled too. I used to travel to Portugal when they had the escudo and Spain whe they had the pesetta. Because both countries are largely rural and agrarian the exchange rate was very favorable making tourism attractive.

    Food, wine and beer was relatively cheap. Taxis and other municiapal services were also. But when they traded their currency for the Euro everyone wanted London or Berlin prices.

    Well they borrowed a ton of money on properties not worth London or Berlin prices and now they whine because they are screwed. Well too bad.

    Spain, Portugal and Greece should be dumped from the market to wallow in the muck of their own making.

    Or maybe they can get Apple or Larry Ellison ot buy them.

    The best thing that could ever happen for the DOW is to END the pain. The European Union should just throw them out, take back the Euros and let them sort it out.

    Besides the Greeks are the rudest people on the planet who cares about them anyway.

  • Report this Comment On June 29, 2012, at 5:25 AM, Harliu wrote:

    Depends on how you see it. Estonia, where I am from, has really won from the common market, as common as that is.

    In general what is needed is balancing, spending can not be higher then income, especially if your loan limit is fully in use.

  • Report this Comment On June 29, 2012, at 10:11 AM, Taxodium wrote:

    "The central figure in any plan to reform the eurozone is Germany. The country underwent its own harsh period of austerity early in the last decade and has been loath to put its own finances on the line to support its weaker neighbors to the south."

    The SouthEuropeans are not "weaker", they are just CORRUPTER! MegaBillions of EU aid to the South in the form of plain subsidies or loans have been legally stolen by their banksters, politicksters and shipowners. Greek capitalists are rumored to own around 600 (sixhundred) billion Euros in Swiss bankaccounts. Nobody sofar has tried to account for all the hundreds of disappeared billions. Why not? Because the EU bureaucracy itself is corrupt and has been bribed by stealing banksters. The voters were bribed by easy and cheap loans, early pensions, even pensions for the dead as in Greece, sick leave for an itching elbow, and dozens of other socialist candies.

    Let them rot in hell!

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