by Merlin Hernandez

Labor unrest in Greece and Spain in reaction to austerity measures, with government spending cuts as a condition of proposed bailouts, is again feeding speculation on which domino will fall first in a tottering Eurozone. A failed EU will threaten US investments, see a drop in US exports, capital market shrinkage, decreased US investment lending, and a rolling back of the slow economic gains of the past two years. The pressure the demonstrations have put on the vulnerabilities of Greece and Spain was evident today with some early tremors on both the Dow Jones and FTSE. This seems to have surprised some analysts who had expected the Fed’s QE3 to provide a cushion in US capital markets and the investment landscape. Any continued downward move would essentially cancel out the gains of ECB and Fed bond buying just two weeks ago.

The shot in the arm from QE3 was meant to encourage increased capital funding and investor confidence and a boost in job growth and consumer spending. But these are underscored by growth in US exports which is central to the effect of QE3 on the economic turnaround. With the EU still the most important trading partner for the US, economic contraction in Europe will have the effect of reduced US exports. Asymmetrical information or not, Wall Street will react to any blip on the horizon, and any exacerbation of European economic woes will produce a negative reaction.

While expansion of QE3 is expected along with ECB bailouts and further bond buying, there is at least a global approach to tackling the fallout from the European crisis. But the belt-tightening in Europe is not likely to ease any time soon and Greece and Spain will continue to be flashpoints that will affect global financial markets. And then there is Portugal and Ireland. The bears are indeed sharpening their claws and gold and silver are growing in attractiveness.