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El-Erian: Neither a Quick Nor Comprehensive European Fix

Mohamed El-Erian |CEO, PIMCO
Friday, 9 Dec 2011 | 11:04 PM ET
NY Jets
AP
NY Jets

As a New York Jets fan, I despair of all the talk about the New England Patriots. Yes they have an amazing combination in Coach Belichick and Quarterback Brady; and yes they have incredibly talented tight ends and, in Wes Welker, one of the most dedicated players in football. But do I need to keep on hearing about it over and over again; and must I constantly worry about what the Patriots mean for the wellbeing of my Jets?

I desperately want to wish the Patriots away, but I cannot. They matter.

After all, the Jets are in the same division, we play them at least twice a year, and they often control our path to the playoffs.

When it comes to Europe, investors around the world also face this exasperating combination of having, but not wishing to pay close attention.

Every week, if not every day, Europe influences stocks, overwhelms sector-specific news, and frustrates careful security selection. The result is wave after wave of manic risk on and risk off days, together with spiking correlations and unsettling volatility.

A week ago, markets were hoping that the combination of an ECB policy meeting and yet another Summit of European leaders would allow them to leave behind — not for a day or a week, but for months and quarters — the unsettling European cloud. Unfortunately, neither was decisive enough; and yet another golden opportunity was insufficiently exploited by European policymakers.

Don't get me wrong, the two events did produce important results. Yet, given the scale and scope of the European crisis, they are not enough.

Put differently, what came out is necessary but not sufficient.

The ECB took bold steps to help banks facing crippling liquidity challenges. But it poured cold water on the notion that it was ready to go "all in" to stabilize the European sovereign debt problems.

At their Summit, leaders provided the foundation for a potentially stronger and less imperfect Eurozone. But they did not go far enough in combining the emphasis on fiscal discipline with growth and jobs, together with real institutional robustness. Meanwhile, they opened what could well prove to be quite a destabilizing Pandora's box.

British Prime Minister Cameron would have no part of the treaty changes proposed by his French and German counterparts. I suspect that this is a leading indicator of broader political strains that will get worse.

Additional tensions are likely to surface as leaders return to their domestic constituencies and, importantly, as the Summit's broad agreements get translated into specifics.

This is not only about stress between the 17 Eurozone countries and the 10 other members of the European Union (such as Britain) that are not members of the zone. It is also about frictions within each group.

European leaders still need to do a lot more, and quickly, if they are to catch up and get ahead of the crisis. Accordingly, and regrettably, the specter of volatility caused by European headlines will not recede for long. Investors need to continue to watch and worry about Europe...and I have no choice but to continue to watch and worry about the Patriots.

Dr. Mohamed El-Erian is CEO and co-CIO of PIMCO, the bond investment house.

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