European nations are trading harsh criticisms over budget issues, exacerbating disunity within the European Union. Strict budget requirements intended to solidify the monetary union are instead destroying the competitiveness of economies by enforcing austerity. Rising uncertainty over budgets is translating to weakness in financial markets. Risk aversion is spreading rapidly from declines in European markets to declines in US markets as well, with all signs pointing to a need for the Federal Reserve to reevaluate its plans to end quantitative easing given the struggling financial and economic outlooks.

1. EUROPEAN DIS-UNION AND THE GLOBAL SLOWDOWN
Core European nations trading barbs over budgets are a mere harbinger of times to come for the European Union and rising disunity. The European Monetary Union is just that, based on monetary policy, not political policy. The budget spate that was brewing last week between Germany and France has now extended to Italy and certain German states as Brussels warns against noncompliance with established E.U. Treaties. Independence parties are gaining traction as the Eurozone finds itself entering a third recession in less than 6-years. The lack of political unity is appalling especially considering the stakes as each nation seeks to hold its own nationalist agenda above the progress of the union. Strict budget requirements set forth by the E.U. Treaties are intended to solidify the monetary base are quickly destroying the competitiveness of economies because it forces austerity.
Austerity as a policy is not a pro-growth measure. It is a temporary solution to fight deficits but ultimately cannot be a bastion of economic well-being. It is merely fiscal prudence, not fiscal stimulus. Nevertheless, the rising uncertainty of budgets is quickly translating to financial market weakness as traders become increasingly wary of the outlook. Declines in European assets are extending globally following today’s abysmal session which is witnessing major mainland equity benchmarks tumble over - 2% lower with the Italian MIB crashing 3%. By comparison to Greece, that is a walk in the park. Add to the mix the Greeks who are trying to make an early exit from bailouts and the perfect storm is brewing. Today alone, the ASE Index is down over 9% with yields soaring as ambitions to end bailout measures spook markets fearful of the nation’s ability to support itself.
Risk aversion is spreading across the Atlantic at a frenetic pace with all U.S. equity benchmarks currently trading in negative territory year-to-date. Aside from the bloodbath in equities, U.S. treasuries are signaling risk aversion in spades with the 10-year note yield falling below 2% today and the 30-year bond at 2.77%. The treasury curve is flattening at a tremendous pace and markets look closer to hitting escape velocity. On the bright side, it’s a great time to get a 30-year mortgage that is if real estate prices are not chasing equities to the downside. With all the signs are pointing in the same direction, the Federal Reserve may have to reevaluate and reverse its decision to end quantitative easing with the financial economy sputtering and the real economy crumbling.
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