Where does the economy go from here?

After a nerve-racking month for the economy, there is a likelihood that things could get worse before they get better over the coming months.

America is running out of ideas for how to give their economy the boost it so desperately needs. In the past couple of years, they have adopted a policy known as “Quantitative Easing” – the process of creating money to buy government bonds and other assets. However, America cannot continually use this approach. If it really worked, they would be giving consideration to doing it a third time in 3 years.

Europe is also beset with huge financial problems. More money as well as more resources have been promised to Greece, as well as a broader remit for the European Financial Stability Facility (EFSF) But with not all member states entirely sure they want to continue to contribute to the bail-out of Greece, the timetable could be further delayed.

Furthermore, the mission of the EFSF is unclear. Some advocate quantitative easing, especially Spanish and Italian bonds, which have recently been under attack. Others feel the recapitalisation of European banks to safe levels, must be the priority. Uncertainty causes delay and yet more uncertainty; the last thing the already skittish European markets need.

The EFSF fund stands at €440 billion, and the biggest concern, is that this will not be enough. Greece accounts for in excess of €200 billion of this figure, and at the current pace of the ECB’s bond buying, the rest will not last many weeks.

There are other ideas gaining traction. These include the offering of European guarantees on bank debt, or the potential for investors to buy bonds in return for non-recourse loans from the ECB. These cheap loans would, theoretically, incentivise investors to buy Italian and Spanish bonds, and in so doing, bring down yields.

Europe’s task is made far harder for two reasons. One is that there does not appear to be any clear strategy. What is the end goal? As with any business decision, there must be a goal in place. But the lack of political leadership and consensus is the crux of the issue. There are a lot of parties involved in the EU decision-making process, and nothing short of a new financial system may need to created. Politics will dictate the economics of the EU in the coming months.