For the second-straight day, financial markets hung in limbo, awaiting word of some grand pronouncement out of Europe. And for the second straight day, there was a lot of talk but very little concrete action to address the crisis.
The session featured an emergency conference call of G7 finance ministers. The U.S. Treasury, which chaired the meeting, said "progress toward a financial and fiscal union" in Europe was discussed but no joint statement was issued.
Meanwhile, tension grows over Spain, where Treasury Minister Cristobal Montoro said the growing spread between Spanish and German bond yields means "as a state we have a problem in accessing markets when we need to refinance our debt," Reuters reports.
Against that backdrop U.S. stocks rose in relatively quiet fashion. The Dow (^DJI) rose 0.3% ahead of Wednesday's ECB meeting and amid chatter about what role the U.S. might play in any EU rescue.
Markets rarely do what they're "supposed" to do but it seems as if stocks are poised to rally dramatically if some "grand bargain" emerges or plummet if European leaders can't get their collective act together.
In late 2011 and early 2012, stocks surged after the ECB launched its Long Term Refinancing Operation (LTRO) to recapitalize banks. A repeat is possible today if the Europeans reach some "grand bargain" to address the banking crisis, says Steve Wood, chief market strategist at Russell Investment. "If the Europeans show a small sign of making a good decision, the market could take that in a very positive way."
Unlike many observers, Wood believes there is an actual "solution" to Europe's problems, which is to move closer to a U.S. model of fiscal and political union, featuring "Europe-wide" solutions such as Eurobonds and common banking regulations.
"The European leaders are going to have to come up with a very dramatic compromise to creating something closer to the United States of Europe," he says. "They need to integrate with one fiscal authority. They need to come together and take 17 poorly cobbled together pieces and make it a cohesive unit."
But that's easier said than done and "it's going to have to get a lot worse before it gets better," Woods predicts. EU leaders are "going to have to make some unpleasant and politically extremely unpopular compromises."
At this juncture, it doesn't seem as if EU leaders are willing (or able) make those choices. Barring some coordinated action by global central bankers, the market might just force it upon them.