Finally we have some encouraging news from Europe.  After weeks of public debate in Germany that raised fears that Europe’s plans to ring-fence the sovereign debt crisis would be torpedoed, the German Parliament, the Bundestag, voted Thursday by an overwhelming majority to accept the planned expansion of the EFSF Eurozone rescue fund.  While this action was not a “silver bullet” that will end the crisis, it was an essential step.  Failure to obtain approval in Germany, the most important creditor country in the Eurozone, would have had a very negative effect on global market sentiment. The fact that Angela Merkel’s coalition emerged unscathed was impressive and encouraging for the future.  German and other European equity markets welcomed the development.

The day after these developments Eurozone markets declined again, underlining the fact that investors still have serious concerns about future steps in resolving the sovereign debt crisis.  There will likely be a need to leverage up the magnitude of the rescue fund. Clearly it will be necessary to strengthen the capital of Eurozone banks so that they can handle an orderly restructuring of Greece’s debt.  We are confident that the governments in the zone will not allow any of their major banks to fail.  We continue to believe that the euro not only will survive this crisis, it will eventually emerge a stronger reserve currency.

Equity markets, of course, also are responding to indications of the likely future course of the Eurozone economy.  Europe’s export markets are softening as the global economy slows, although the recent weakness in the euro should counter this factor to some extent.  The latest consumer confidence and business climate suggest that Eurozone economies are weakening. Fiscal austerity programs will constitute an increasingly important headwind.  The various national economies are either close to (“on the cusp”) of recession or, in several cases, already in a recession.  The mostly likely prospect is that the Eurozone economy as a whole faces a quarter or two of stagnant performance, avoiding outright recession but achieving very limited advances. Further into 2012 a slow recovery process should develop.

Therefore, while we might be viewed as optimistic on Europe in comparison with many other market analysts, we remain reluctant to add to our present heavily underweighted Eurozone positions in our international and global multi-asset class portfolios.