European Heads of State Clash

There has been a great deal of posturing and positioning this week amongst European leaders as they hold their 18^th summit of the past two years.   The strong countries are being pushed to help their weaker neighbors, while Greece is being called upon to stick to the austerity measures they previously agreed to or risk being cut-off from aid.  The most recent heated discussions centered on issuing joint Euro bonds to raise money for Greece, Spain, Italy and Portugal.  But joint-country borrowing is not finding any support from Germany, which is one of the few European countries still seeing its economy in positive territory.  This strategy is extremely unpopular amongst German leaders and their citizens who are afraid of being drug into a recession.

Policy makers need to create economic growth initiatives, not just force cost cutting on already weak economies.  They also need to have a stronger fiscal union to provide true support for their monetary union.  The European Central Bank should be ready to provide liquidity to the banks as government debts will certainly require further restructuring, and although austerity is important, creating economic growth is more important.  Unfortunately it may take a real crisis, like Greece leaving the European Monetary Union and defaulting on its debts, for the parties to find common ground for a solution.  The deeper this crisis goes, the more volatility we’re likely to see in the prices of risk assets.