The recurring gaze of the global financial community upon Europe is vested in hope, fear and uncertainty. For the past 21/2 years, the de facto insolvency of several members of the European Community has cast a pall on greater Europe's ability to accelerate growth and rescue many of its citizens from an increasingly impoverished and deteriorating quality of life.
Market participants are close to desperate for deliverance. Every new data point reinforcing a "solution" to the crisis leads to manic "risk on" rallies in the global markets.
Our latest example of this arose last Friday, June 29. After an all night negotiating session led to Euro-leaders tightening central planning for alleviating stress in various Euro-markets, global equity indices rose several percentage points in a single day. Multiple factors led to this extreme result - short covering, relief buying, end of quarter performance chasing by underperforming fund managers, and trading programs chasing momentum.
Will this rally have legs? Doubtful, with global economic growth lagging and 2nd quarter earnings in the US and abroad telegraphed to bring slower, if any growth. But possible! Anything seems possible in the bipolar markets of the past few years.
The long term reality in Europe however, is that austerity has not worked, except for the Germans - in every other instance, growth has slowed, deficits have actually grown, and the fiscal hole has deepened and widened for countries trying to do "the right thing". What exactly "the right thing" to do when confronted with a mountain of debt and rising sovereign interest rates is, is difficult to surmise though!
The fiscal, monetary, political, sociocultural, and other complicated factors currently paint an indecipherable European economic canvas - proper interpretation and resulting required action remain clouded in mystery.
One central fact remains clear though - Eurozone debt is unmanageable, growing, and will have to be slowly turned manageable through a depreciated currency, higher taxes, and other measures that will lead to ongoing economic and social unrest, until stability across the region reemerges, many years down the line. Some countries will fare better than others....
But with Spain's unemployment rate at 25 percent, Greece's not far behind, and unemployment for the region hovering around 11%, the misery index for the continent is at alarmingly high levels. Economic pain and social unrest almost always go hand in hand. With almost equal certainty, it appears the "workout" of openly or clandestinely insolvent countries will take years, perhaps a decade, not months. And euphoria like we saw last Friday will almost certainly be temporary. Gains, if any in Europe, will come in fits and starts, over an elongated stretch of time.