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Angela Merkel (Photo by Sean Gallup/Getty Images)

A new Europe?

Money | Markets react positively to plans for a more centralized eurozone

Issue: "De-coding Morsi," July 28, 2012

The Dow Jones Industrial Average lost more than 1,000 points in May, giving up all of the first quarter's gains, and more. European fears, a soft housing market, and flagging consumer confidence brought the big drop.

Then, suddenly, a turnaround. The Dow rose more than 200 points on the last trading day of the second quarter, and gained nearly 500 points for the week.

Why the change? Investors are starting to believe that the eurozone might actually solve its 30-month-long debt crisis. On June 30, leaders of the 27 European Union countries agreed on an aggressive plan that looked to the markets like it was more than just kicking the can down the road.

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EU leaders declared they would centralize regulation of European banks and, if necessary, bail them out directly, instead of funneling loans through governments that already have too much debt. Leaders also said they would ease borrowing costs on Italy and Spain, the eurozone's third- and fourth-largest economies.

Two more agreements turned this summit-the 19th since the debt crisis began three years ago-into what could be a historic event. Leaders agreed to rescue floundering countries, without forcing them to make painful budget cuts if they've already made economic reforms. And Germany and France agreed to tie their budgets, currency, and governments more tightly to others in the European Union.

The prime minister of Ireland said the plan marked a "seismic shift in European policy." British Prime Minister David Cameron said that "for the first time in some time we have actually seen steps ... to get ahead of the game."

But some Germans, who will largely foot the bill for the plan, were not as pleased as global investors and EU leaders were. Bavarian governor Horst Seehofer, who leads a conservative party that is a key member of German Chancellor Angela Merkel's governing coalition, was skeptical of the plan and told Stern magazine that he would turn next year's elections into a vote on Europe.

"The fact that others want to get at our money without asking too much of themselves is deeply human," he said. "But it won't solve the problem."

2.1 steps forward, 1.9 steps back

Associated Press/Photo by Chris O'Meara

The U.S. housing crisis was disproportionately responsible for the Great Recession, so it was positive news that the number of Americans signing contracts to buy existing homes jumped nearly 6 percent in May to the highest level since April 2010. The National Association of Realtors' report, released in late June, said spring buying was particularly strong out West. Investors are driving the market there, racing to buy distressed properties and take advantage of today's hot rental market.

But there was other news: U.S. manufacturing slowed sharply in June to a level that indicates the sector is now contracting, marking the end of almost three years of growth in domestic manufacturing. Manufacturing had been one of the few bright spots during the sluggish recovery, and the sector had expanded for 34 months in a row before June. The index's new orders component, a forward-looking indicator, was hit particularly hard. It fell 12.3 percentage points in June to 47.8. Any number below 50 indicates contraction in the sector.

Most analysts still believe the news is a net positive, as other indicators such as car sales looked strong. Nonetheless, in late June the Commerce Department reiterated its estimate that U.S. Gross Domestic Product growth this year would be only 1.9 percent, a number that barely keeps pace with population and productivity gains, and leaves virtually no capacity for new job creation. - Warren Cole Smith

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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