Greece votes to stick with euro zone

After months of political turmoil, a slim majority of Greek citizens voted for the center-right New Democracy Party in a signal that Greece will stick with the euro zone in spite of widespread opposition to financial austerity policies imposed by the EU in the face of uncontrollable debt.

World markets reacted cautiously but favorably to the news, which turned the tables in the wake of last month’s vote in which a sizeable majority of Greeks voted for the left Socialist Party, which promised to roll back austerity policies and press the EU for better repayment terms for loans. Investors appeared cautious about the news, in part, because of the volatility of the Greek situation. A large and vocal portion of the population blames the economic catastrophe on the financial collapse globally and political corruption locally, leading to massive ongoing protests and violent clashes with police in that country.

However, in mixed news Spain announced over the weekend that its borrowing costs have already exceeded its ability to pay back loans, in spite of the widespread and harsh austerity measures imposed there. Along with that country, Italy similarly appears to be on the edge of bankruptcy as its borrowing costs soar and credit rating slides. Although EU officials claim the euro zone will maintain its integrity, increasing doubts about the ability and willingness of countries like Germany and France to extend large lines of credit indefinitely to countries with terrible records for keeping balanced budgets, collecting taxes, and living within their means.

At the G20 meetings this week in Mexico world leaders are expected to encourage EU leaders to act quickly and develop a comprehensive plan for bringing its debt under control and paving the way for a more stable financial framework. Otherwise, mounting debt and the potential bankruptcy of some of the world’s largest economies threatens to not only to frustrate an economic turnaround globally, but may plunge them—and the rest of the world—back into recession.

Stocks rally on move by central banks, but the rally won’t last long

In a sign that the U.S. and European Union are serious about resolving the ongoing debt crisis in the euro zone, the central banks of five countries, including the European Central Bank, the Bank of England, Bank of Japan, Bank of Canada and the Swiss National Bank, announced a plan to infuse banks across the E.U. with fresh capital. The move comes in an effort to assure financial markets that the debt crisis is being taken seriously and policies are being developed to resolve it.

The announcement comes on the heels of global financial markets being battered in the last two weeks as investor confidence has withered in the face of the ongoing debt crisis, as well as the inability of governments to take swift action to alleviate it. The move by the central banks is supposed to reduce the cost of a program under which banks in foreign countries can borrow money from their own central banks by about 40 percent, with much of the money coming from the Federal Reserve Bank in the U.S. This is supposed to infuse banks with fresh capital and shore up their liquidity in the hopes that they will begin lending again.

The news led to today’s rally on Wall Street, one of the biggest yet, with the three main indexes rising 4 percent or more, representing the largest gain since March 2009. Stock markets across followed favorably with exchanges in London, Paris, Berlin, and Euro Stoxx rising from 3 to 5 percent.

However, the rally will be short lived, as they have proven to be in the past. Although investor confidence depends heavily on the perception that governments are taking strong action to deal with avalanche of debt arising from a slowing global economy and shrinking tax revenues, the underlying reality is that the fundamentals of the global economy are not sound. There is too much money controlled by two few private actors, particularly large hedge funds and other investment banks, that can be moved around too quickly, thanks in large part to financial deregulation and advanced communications technology. Moreover, there is too little democratic accountability, particularly in the U.S., which has deregulated banks, insurance carriers, and other financial institutions to the point where the fraud and theft of “complex financial instruments” are legal grey areas.

Plagued by serious unemployment both the U.S. and E.U. cannot jump-start their economies even if the debt crisis is resolved favorably. Assume banks achieve stability and return some of their liquidity to businesses and consumers in the form of loans. Very few companies will enact aggressive expansion strategies that require hiring new workers, and banks will not lend to consumers without jobs. Thus, even if the debt crisis is resolved, there is no guarantee that the labor market will improve, leaving governments in the lurch as revenues from taxes remain stagnant and requiring them to make further cuts in entitlement programs that exist to help citizens beset by difficult financial times.

This catch-22 is not lost on investors, who more than once in the last few years, have rallied markets on some slim piece of good news like the announcement made today by central banks, only to have their hopes dashed the next day by a slim piece of bad news, for example, that jobless claims are up. The surge in markets today is therefore not “good” news in the sense that it does not guarantee that the so-called “jobless recovery” is actually underway.