EU Discounting Mechanism

I don't want to wait for our lives to be over
I want to know right now what will it be
--Paula Cole

There is some belief that the European situation has been so broadly reported that markets have factored in most of the outcomes. Thus, when some 'resolution' actually occurs, it may largely be a nonevent for the markets.

Perhaps, but efficient discounting requires certain conditions to be present. One is that the information available can be interpreted as to its meaning. Stated differently, available information must permit various possible outcomes and their values to be forecast. Not sure this condition is present for the EU. Each day I read new interpretations of the Greek crisis alone. The leveraged, interconnected nature of global economies and financial systems make it difficult to grasp what will happen.

Another condition that must be present is the understanding of risk and reward associated with the decision. Market partipants must understand the penalties associated with being wrong, and the benefits associated with being right.

Through their past interventions, policymakers have skewed the risk/reward relationship far away from the one present in free markets. Poor decisions have largely been bailed out.

To the extent that market participants expect another round of bailouts, then they may be prone to take on more risk than they would in unhampered markets.

Stated differently, moral hazard may be impairing the discounting mechanism, causing unwise decisions to be made in front pending EU outcomes.