German Chancellor Angela Merkel met with the English Prime Minister David Cameron to discuss the Eurozone crisis. Both leaders support a two-speed approach to the future of Europe.

Several leaders outside of the Eurozone, such as U.S. President Barack Obama, have urged Germany and the other participating nations to take immediate action on the crisis. Cameron stated, “I’m very clear that urgent action is needed to deal with the market uncertainty… [it] is about building firewalls and recapitalizing the banks.” Although Cameron has urged the Eurozone to solve this crisis, he has made it quite clear that he expects them to solve their own problems.

The United Kingdom and Denmark, although members of the European Union, negotiated agreements in 1992 to be excluded from the euro. Both countries wanted to maintain their own currency, which now appears to have been the best course of action.

Merkel has already admitted that the Eurozone crisis has been building over the last ten years and will not be solved in a day. Merkel stated, “now it will also take a few years to get things right again.”

Many economic experts have claimed that the Eurozone structure is faulty because seventeen nations are connected through a currency but are not coordinated with their budget plans. This lack of budget coordination is not a problem until a crisis such as the 2008 recession arises; now the weaker economies are dragging down the whole system. Merkel agrees that something must be done to integrate these nations better. “We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy,” she said.

European Union officials in Brussels want Germany, the strongest economy in the Union, to accept jointly guaranteed European debt and allow the European Central Bank to issue eurobonds. These eurobonds would help to regain some of the debt for the other countries as well as Germany, but Merkel worries that issuing these eurobonds would harm the German people and the German economy more. Before any kind of fiscal union is created in Europe, Merkel is insistent that there needs to be more stability from other European Union countries. Some experts claim that the integration cannot wait.

Another suggestion from the European Commission and European Central Bank is the creation of a central banking authority that would help alleviate concerns of excessive debt. Currently, Spain’s finance minister has claimed that credit markets are “effectively shut” to Spain at this time, making it impossible for them to get the billions in euros to rescue their banks. As of 6 June 2012, the European Commission has announced a plan for a “bank union” in Europe that would make it easier for countries like Spain to get credit.

Although many worry that Spain will need a bailout, Spain insists that they will not. Merkel has stated that Germany will not pressure Spain to take a bailout although the funds will be there if they are necessary.

The European Central Bank cannot provide bailouts due to the ‘no bailout’ clause of the Maastricht Treaty of 1992. However, starting in July there will be a 500 billion euro rescue fund known as the European Stability Mechanism.

Merkel has insisted on austerity measures in bailout countries such as Greece, but these measures have been met with great opposition. Many claim that what governments should be focusing on is growth. Merkel claims, “budget consolidation [aka austerity measures] and growth are two sides of one and the same coin.”

Currently a budget-discipline agreement is being discussed across Europe and has already been ratified in some countries. The Irish referendum vote in the previous week affirmed the agreement. Merkel’s coalition government in the German Parliament is working to get the two-thirds majority necessary to approve the agreement. However, the opposition party – which believes the debt crisis can only be solved by spending for growth – has also requested a financial transaction tax be added to the agreement or at least followed by Germany.

The United Kingdom, with London being the biggest financial center in Europe, is opposed to a Europe-wide financial transaction tax. Cameron stated that the tax would “simply [draw] those transactions offshore and to other places.”

On 7 June 2012 Merkel stated, “we need a political union first and foremost… step by step we must from now on give up more competences to Europe, and allow Europe more powers of control.” Although Cameron agrees that the Eurozone must become more integrated financially, his country is not a member of the Eurozone and would not have to deal with the consequences.

After meeting with Cameron, Merkel announced that she is tolerant of a ‘two-speed’ Europe, meaning that while the current Eurozone countries become more integrated fiscally and politically, other countries such as Denmark and the United Kingdom that use their own currency would still be a part of the Union but relegated to the edges. Merkel claims, “we have to be open. We always have to make it possible for everyone [to join]… but we must not stop because one or the other don’t want to come along just yet.”

Merkel says that one of the greatest aids for the European Union countries is to become more competitive. She claims that the economies will improve when they begin producing more on the global market.

An EU summit is planned for later in June and the leaders will discuss plans for a political union. However, according to Merkel, the decision and the arrangements will not be completed in one summit and more meetings will have to be planned.

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New York, U.S.A. – Bankrate.com’s monthly Financial Security Index hit a new high of 99.9 in April 2012, surpassing the previous high-water mark of 98.5 that was last recorded in May 2011 (the polls began in Dec. 2010). Americans’ attitudes regarding their net worth and overall financial situation also reached new highs this month. Sentiment regarding savings improved for a fifth consecutive month, and Americans’ comfort level with debt is at its highest point since June 2011.

Despite these positive developments, Americans are still wary of investing in stocks. The poll found that 76% of Americans are not more inclined to invest in the stock market despite near record low savings rates, and merely 18% of Americans are more inclined to invest in stocks today. Another soft spot is job security: 22% of Americans reported less job security than one year ago versus 20% that reported better job security.

“Overall, there are several positives that can be taken from this month’s report,” said Greg McBride, CFA, Bankrate.com’s senior financial analyst. “Americans are feeling better about the money they have in the bank and in their investment portfolios, and they’re also feeling better about what they owe. However, job security is still a pain point, and there are plenty of reasons to worry that we might be headed into a third straight weak summer for the economy. The trouble spots include jobs, high gas prices, the ongoing European debt crisis and more.”

A reading of 100 is considered the Financial Security Index’s baseline; any reading above 100 indicates improving financial security compared to one year ago, while any reading below 100 indicates decreasing financial security compared to last year.

Here are more details regarding the components of the Financial Security Index:

Overall Financial Situation

• Consumers’ feelings about their overall financial situation hit a new high, with 29% saying their overall financial situation is better today than it was 12 months ago, compared to 26% saying it is now worse.
• Those under age 50 are more likely to report a better overall financial situation, while those age 50 and up are more likely to report a worse financial situation than one year ago.

Net Worth

• With the stock market near four-year highs, more consumers report higher net worth compared to one year ago than at any time since polling began in Dec. 2010.
• Twenty-nine percent report higher net worth versus 23% that report lower net worth.
• Households with income of $50,000 or more are the most likely to report higher net worth than last year.

Savings

• The margin between those feeling worse about their savings and those feeling better about their savings has been nearly cut in half since Dec. 2011.
• Those under age 30 tend to be more comfortable with their savings, and those age 50 and up tend to be less comfortable with their savings compared to other age groups.

Debt

• Americans’ comfort level with debt is at its highest point since June 2011.
• More consumers report being more comfortable with their debt than less comfortable.
• Households with annual income of $50,000 or higher are more comfortable than other groups, while households with income under $30,000 are less comfortable.

Job Security

• Job security slipped following the disappointing March jobs report that was released on April 6.
• Only one in five (20%) Americans say they are more secure in their jobs compared to last year; 22% are less secure.

Investing in Stocks

• Those under age 30 are only slightly more inclined to invest in the stock market than the overall average (23% versus 18%), despite having the luxury of a long time horizon and having a greater burden of retirement savings than any previous generation.

The new study was conducted by Princeton Survey Research Associates International (PSRAI) and can be seen in its entirety here: http://www.bankrate.com/finance/consumer-index/financial-security-poll-0412.aspx.

The PSRAI April 2012 Omnibus Week 1 obtained telephone interviews with a nationally representative sample of 1,000 adults living in the continental United States. Telephone interviews were conducted by landline (600) and cell phone (400, including 191 without a landline phone). Interviews were done in English by Princeton Data Source from April 5-8, 2012.

Statistical results are weighted to correct known demographic discrepancies. The margin of sampling error for the complete set of weighted data is plus or minus 3.6 percentage points.

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This year the world witnessed repercussions of the most disastrous and indecisive fiscal management in the Euro Zone that shattered one’s sense of security and disturbed the lives of millions of people.

The debt crisis of a hand-full of members of the Euro Zone has potentially inflicted a wound, that has possibly introduced a series of deathly rating downgrades across the region and exposed a lot of risky behavior, especially in the banking industry, credit markets and dithered global economic recovery.

The Contagion

According to the Oxford Dictionary, the word contagion refers to a communication of disease from one person to another. In the world of finance and economics, it refers to the spread of economic crisis in one county’s bond or equity market to another.  In this case, there has been the communication or spread of fear, faithlessness, and inefficiency at the political level and, most tragically, the spread of an illogical attitude.

Greece was the first to be exposed to massive levels of debt and because of its inability to service its debt, apparently under a veil of ignorance and falsehood, became doomed and fear of default spread like a raging fire, putting into question the competency of these countries.

Crisis of Consensus

German Chancellor Angela Merkel said the European Central Bank cannot be relied upon to resolve the crisis, since its statutory role is different from the Federal Reserve Bank or the bank of England. She further said that “no single stroke” will work and joint euro bonds are “unthinkable.”

On the other front, the occasion of the failure of the recent German bond issue, a senior fellow at the Council on Foreign Relations in Berlin said that “it’s only got us closer to the end-game, either the break-up of the Euro or Euro bonds.”

The German Government had always been opposed to jointly-issued bonds, because it involves German taxpayers’ money for members of the bloc, it involves partial backing by German Government and, finally, it will contribute to a rise in cost of borrowing for Germany.

The Catastrophic Logic

In his book, “Back From The Brink,” Alistair Darling said he is gravely concerned that the coalition is repeating the mistakes made during the Great Depression in 1930’s in the United States.

The United States went into double-dip recession in 1937 because its government followed stiff fiscal tightening policies, andUK and debt-laden countries in the Euro-Zone today are following suit.

According to Keynesian school of thought, when effective demand is weak, expansionary fiscal policy should be followed, but under these circumstances, widening of authority of the ECB to finance state expenditure is quite undeniable rather than taking the hand away.

Greece has almost frozen its spending along with Italy to some extent, and it has strengthened the belief that the efforts should be in the reverse order to invite stability across the countries. Hopefully, the new proposal by Merkal to bring in radical changes in treaties will resurrect the rubble.

Image Courtesy of   http://www.flickr.com/photos/europeancouncil/

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Global economic conditions today are awfully bleak and momentum in global economic growth is certainly uncertain. The European fiscal fiasco jeopardized global growth as a whole and further situations became aggravated with the inability of European leaders to put in place a plausible accord that can ensure a bright future for the Euro Zone.

Reasons for fiscal complications of the eurozone are many and varied, but perhaps fiscal dissonance among member nations is the prime cause for this economic menace. Eurozone as an Economic Union almost failed to maintain fiscal integrity with respect to expenditure patterns of the government and solely focused on monetary management overlooking the totality of fiscal significance.

The root cause of the delayed response to the Sovereign Debt crisis is nevertheless the limited capacity or lack of willingness on the part of the European Central Bank (ECB). A return to economic stability relies on ECB allowing greater authority and becoming a last-resort lender to troubled economies,

Industrial orders in the eurozone fell by 6.4 percent in September, the steepest decline since the dark days of 2008. Another closely watched index, based on surveys of the purchasing manager in manufacturing and services is also precarious, falling below 50 percent to 47.2, where anything below 50 implies shrinking activity.

“Europe is going into recession, if not already in one,” according to Frederic Neumann co-head of Asian Economic research at HSBC. Pranay Gupta, Chief investment officer for the Asia Pacific region at ING in Hong Kong, said “Europe is where the United States was three years ago.”

The financial crisis of 2008 was firstly an output of regulatory deficit over the financial industry and a consequent credit crunch that followed, along with other events such as death of Lehman. However, the eurozone economic headwinds is basically due to exhausted state resources and the high cost of borrowing.

Recently, Germany suffered from a lack of strong demand for its 10-year safe bunds with the government selling only 3.6 billion euro bunds. The results suggest that “Germany is not immune to increasing risk aversion in the euro–zone but market”, according to Marc Chandler of Brown Brothers Harriman.

“The only thing that would work is printing Euros, paying down the debt and risking inflation” said Dave Rovelli, Managing director of U.S equity trading at Canaccord Genuity. The only alternative in sight is to establish a consensus among European leaders as to how to get out of this mess and also, how to avoid falling into the same trap in future.

Image Courtesy of   http://www.flickr.com/photos/europeancouncil/

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