Farr: Stocks and Europe, Europe, Europe

This post was written by Michael Farr and Keith Davis.

Stock prices continue to ebb and flow based largely on the news coming out of Europe . It is very hard to discern the ultimate outcome of this crisis, especially with the numerous and often conflicting reports coming out of the region.


One day we hear that the Germans will allow the Greeks to default, and the next day Angela Merkel says, in words of Wall Street Journal reporter Marcus Walker, that "Germany remains committed to financing Greece through the euro zone's bailout funds until Greece can repair its own finances through austerity measures." What are we to believe?

It seems to me that the ultimate resolution in Europe is likely to be determined by the people and not the politicians. Greek citizens, angry about forced government spending cuts, could doom austerity measures to failure through demonstrations, protest and civil unrest. And if the Greeks are unable to show solid progress toward their austerity goals, the money from the IMFand ECB will stop flowing.

German citizens, on the other hand, could throw their politicians out of office due to their willingness to continue to fund the profligate Greek spending. If hardline replacements are elected in Germany, Greece is unlikely to get their promised bailout money. So who will bend first, the German people or the Greek people?

But there is a third party involved: China.China is uniquely positioned to help due to its $3.2 trillion in reserves. In addition, China has a strong vested interest in seeing Europe stabilize and ultimately prosper.

In recent days the Chinese have talked more about their willingness to help, and this should come as no surprise. It must be stressed that China is not doing this out of the kindness of its heart. The most important reason for a possible Chinese intervention is that Europe is one of the country's largest export markets. In addition, the Chinese have been looking for a way to diversify their reserves away from the US dollar .

But aside from those obvious benefits, it appears as though China will seek, according to The Wall Street Journal, "'market economy status, a technical designation that would provide more favorable treatment in certain trade disputes."

And needless to say, if China does come to the rescue it will require that the Europeans get their fiscal houses in order as a precondition to any future help. We suspect that if needed, the Chinese have too much at stake to stand by and watch Europe go down the drain.