The world seems to be crumbling before our very eyes. Greece is on the cusp of leaving the eurozone, and the much-larger Spain waits in the wings as the flashpoint on the continent. China's growth is slowing enough that the country has had to slash interest rates to boost demand. Brazil, one of the miracle economies of the past decade, is now experiencing growth slower than Japan, a country in the midst of a three-decades-long stagnation.
Watching different economies hit the skids kind of feels like being within earshot of a 50-car pileup on a foggy day. The Dow Jones Industrial Average (INDEX: ^DJI) has managed a small rally this week that pushed it back into positive territory for 2012, but the global environment feels the most uncertain since late 2008.
Well, thanks for ruining my Friday!
Against this backdrop, President Barack Obama spoke up about the crisis today. To date, the United States has been somewhat of a bit player in the global drama, which could be a surprising role for the world's largest economy. However, while the United States was the flashpoint of the global panic in 2008, in the current crisis the U.S. has mainly been seeing its own recovery derailed by external forces in Europe. The power broker in the current standoff is none other than German Chancellor Angela Merkel, a leader who suddenly has a stunning amount of sway over the global economy.
Merkel has been pushing for greater austerity across the Continent. The obvious reasoning for that is that countries like Greece and Spain have out-of-control fiscal situations that would leave them either broke or soon to be broke without European assistance. Germany itself weathered hard reforms at the outset of the last decade, and would prefer that these countries fix their imbalances rather than receive handouts that kick the can down the road and delay an inevitable future fiscal nightmare.
The counterpoint is that -- as we learned in 2008 -- financial crises can quickly spread and become unmanageable, causing far more damage than the cost of propping up weak economies. With Spain's budget minister saying the country is shut out of capital markets, that situation looks more likely than ever.
Today, Obama made his position known in a televised address where he encouraged European leaders -- effectively, Angela Merkel -- to act with "more decisive and concrete" actions to fix the crisis. Of course, Obama has his own political skin in the game. Europe's slowdown and the resulting impact has scuttled job growth in America. With unemployment a key concern heading into elections in November, job growth is at the forefront of Obama's needs if he's going to win a second term. Merkel has the opposite problem. With Germans firmly opposed to bailing out weaker countries like Spain and Greece, she'd have to deal with her own constituents if she acquiesced and veered too far from the austerity path.
Does Obama matter?
Will Obama weighing in matter? In contrast to past financial matters over the last half decade, it'd seem the president matters surprisingly little here. As it's a eurozone problem, French President Francois Hollande is probably in a position to enact more change. In his recent election campaign, he promised an agenda that'd focus more on growth within Europe.
Whether you like it or not, leaders inside Europe have an unprecedented impact on shaping the future of your portfolio. One path is for a larger banking union across the Continent and putting more of an emphasis on growth. The other path looks to resemble more of an "every man for himself" situation on the Continent. Neither is an attractive proposition, but we're past the point of economic success stories; nothing will look pretty at this point, and one of those situations looks quite a bit messier.
Back to the markets
Not surprisingly, markets rose after Obama's remarks. As of 1:20 p.m. EDT, the Dow is up 0.56% while the Nasdaq (INDEX: ^IXIC) is seeing a 0.71% jump and the S&P 500 (INDEX: ^GSPC) has seen its own 0.43% gain. The hope of keeping the eurozone together and avoiding a catastrophic breakup holds far more appeal than the alternative.
This week's rebound stopped a brutal May and beginning of June that had rolled back the gains of a record first quarter. While it's always nice to see markets on the rise, it's also important to remember that the give and take of market moves in the past couple of weeks pales in comparison to the outsized moves that could occur around the Greek elections on June 17. That is to say, it's been pretty rocky the past month and a half, but the main event hasn't begun.
If that's a scary thought for investors, the key action is to hold on to high-quality companies with great brands that could withstand a downturn. In spite of all the pessimism around the world in the past decade, the world economy still grew at nearly a 4% pace during that time span. While short time frames can be rough, the global economy's been on a pretty consistent winning streak since the time of the Black Plague. I'll keep thinking long-term and staying invested, but also be careful to pick up those great companies that can weather the storm.
Take the long-term view
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At the time thisarticle was published Eric Bleeker owns shares of no companies listed above. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try anyof our Foolish newsletter servicesfree for 30 days.
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