Six of the world’s major central banks, led by the Federal Reserve, this week announced an expansion of a program to increase the availability of U.S. dollars to European banks and lower their cost of borrowing these funds. While this action was not designed to solve the central challenge the European governments are experiencing - the spiking interest rates they must pay when issuing their sovereign debt - it will likely calm the tangential problems this has caused within the European banking system. 

Not surprisingly, this show of solidarity by the world’s central banks encouraged investors, triggering a sharp rebound in the European equity markets on Wednesday. Two hours before the announcement by the central banks, China provided some encouraging news when its central bank cut the reserve requirement from 21.5 percent to 21.0 percent, the first cut since 2008.  The rally also affected stocks in the Americas, especially after additional announcements suggested U.S. business activity was gaining speed. The ADP Employer Services data showed that 206,000 workers were added by companies in November, a number distinctly higher than consensus, though the weekly unemployment claims data released subsequently was relatively weak. The Institute for Supply Management showed business activity expanded at the quickest pace since April. The National Association of Realtors also reported an unexpectedly large increase in pending home sales in October. Finally, the Federal Reserve’s Beige Book survey showed that the U.S. economy, while weak, showed no signs of slipping into a recession.

Hopefully, the leaders of Europe will be able to find a way to maintain their existing Common Market structure over the next several months of negotiations. A lack of enforcement that would keep countries financially sound is at the root of the current crisis. It now seems clear that the only way the more disciplined countries (Germany, Netherlands, etc.) will provide the necessary current financial support to the less disciplined countries is for the members to submit to an enforcer that will dictate actions when a member’s fiscal and monetary policy falls below the Maastricht Treaty’s existing standards. The European Central Bank also favors this path and has indicated that it may be willing to take a wider role in solving the crisis, if such a plan is approved. Given that the alternative would likely reduce the long-term economic outlook of all the euro-zone countries, one must hope the parties will complete the negotiations successfully.

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