The upcoming week's economic data include: inflation, retail sales, consumer sentiment and industrial production. Two volatile manufacturing surveys, the Empire State Index and the Philadelphia Federal Reserve Index are released on Thursday. Both were strongly negative last month, allowing for a potential bounce this month. The markets will continue to focus on the debt issues in Europe as euro zone banks and Greece come under increasing pressure.

Commentary
 
Wake Up Call

Tension over the European debt crisis is picking up and the stakes are getting higher. Friday's 2.69% sell off on the Dow was only one indication of the anxiety being created by falling confidence in both political leaders and economic reforms.

Friday began with the resignation of the European Central Bank's (ECB) chief economist Jurgen Stark, a German known for his opposition to recent ECB troubled debt purchases and as an advocate for countries managing their own debt. His resignation sparked concerns over the stability of the European Central Bank, the main institution that was active this summer in supporting euro zone finances. While many debate how independent the ECB should be, few would like to see it falter at a time when dysfunction best describes the euro zone's approach to solving its sovereign debt problems.

The resignation struck consternation in Germany, especially, as it leaves the country with potentially less influence at the ECB than in the past (a second German representative resigned earlier this year). Germany delivers the strongest economy in Europe and remains the best hope of the euro zone's resurrection. However, bailing out profligate neighbors is not popular in Germany (nor the Netherlands, Finland and other countries). Germany and others worry that rising debt on the ECB balance sheet and leadership instability could endanger the euro. A rapidly weakening euro could help troubled nations, by making debt less expensive. However, it could also lead to unwelcome inflationary pressures.

While the ECB, technically, can provide the answer to Europe's debt crisis, the solution is extremely unpopular with political leaders. As a central bank, similar to our Federal Reserve, the ECB can print money - much as the US did through our quantitative easing programs QE1 and QE2. In Europe, the ECB could potentially step up purchases of sovereign debt (and pump money into local economies) or create a eurobond that would be backed by all of the euro zone countries. Quantitative easing is not without repercussions, however. It can create long term debt issues and burdensome taxation on both the responsible and irresponsible parties. Unlike the Federal Reserve, the ECB is the central bank to 17 distinct and very separate countries - each with strong and different political pressures. Agreement is hard to come by short of a dramatic crisis.

Adding to the complicated picture, Greece was back in the news this week. The country is in danger of missing budget-cutting targets, which are tied to future bailout payments. At the same time, Greece is under pressure to provide collateral to any future bailout money - a requirement the country can ill afford. Austerity measures are being pushed through, but they aren't going far enough. And the populace is hardly taking the pressures sitting down. On Saturday an estimated 21,000 workers, students and ordinary citizens clashed with riot police while protesting cutbacks. Meanwhile, on Sunday the Greek government announced that it would impose a new property tax to help meet its target goals. Without further aid, the Greek government will run out of cash in a few short weeks.

Part of the fallout from increasing uncertainties has been a sell-off of European bank stock in the last few weeks. Downgrades, exposure to troubled sovereign debt and increased costs of borrowing dollars needed to repay loans in US currency have all contributed to concerns over the viability of European banks.

So what happens if the ECB stops buying bonds from Italy and Spain or Greece, Ireland and Portugal? Or if Greece cannot meet its targets and future aid is withheld? Or if the Germans say, "No more!" Or if a major bank in Europe fails?

Shhh. It seems like we can't talk about these possibilities. The issues aren't being sufficiently addressed, as if bringing them up might be tantamount to admitting the European Union cannot solve its problems. The assumption is that - in the end - European Union leaders and/or the ECB will do what it takes to keep the union together and will find a way to share the pain. To talk about failure is taboo.

Except, of course, in the markets, which do a wonderful job of reminding us about all sorts of uncertainties. They give the wake up call, when no on else will. Unfortunately, when the markets trumpet their fears, we investors suffer. The silver lining is that these markets are the same ones to cheer the promise of solutions.

Let's hope the European political leaders listen to the market's call and find a workable solution soon. As painful as a down day in the market is, it is nothing compared to the economic, political and financial costs that could result from the break-up of the European Union.