As in the case of Europe, the U.S. unemployment situation is likely to get worse in coming months because few moves toward meaningful structural changes in the labor market (e.g., training for the unemployed to improve skills), or fiscal shifts to aid hiring (e.g., targeted employment tax-credits) are likely to be implemented before the November presidential elections. We may have to wait for a reelected President Obama, or President Romney, to move in this direction in 2013.

Earlier this month, I suggested that investors closely watch 12 macroeconomic and financial indicators in deciding whether the world economy is improving or worsening (12 Indicators for 2012, January 3, 2012). Some readers wrote to ask if I would discuss what those indicators would mean for investment strategies. That was the genesis of the present piece which is intended to be consistent with expectations on the economic and financial fronts.

On Friday European leaders completed their 14th or 15th crisis-related summit meeting since the beginning of 2010. Fitting a pattern, the results were termed a success by the leaders. Wolfgang Schuble told Focus magazine that he was certain that the leaders will be able to handle the debt crisis in Europe with the agreed, far-reaching measures on institutional reform of the European currency union. A close examination of factors behind the agreement suggests, however, that the decisions may end up being another band-aid solution to the still festering crisis.

Major world equity markets had their best weekly performance in three years, boosted by economic numbers from the US, and by hopes that European leaders may find a solution to the debt crisis. U.S. manufacturing showed signs of regaining momentum, with both new orders and exports coming on strong. At weeks end, jobs numbers for November indicated that the open unemployment rate had dropped from 9.0% to 8.6%. Healthy sales on Black Friday (November 25), the traditional beginning of the holiday shopping season, also cheered investors during the following week.

The most important risk indicator in Europe-and for the global economy-is Italys ten-year bond yield. Italys 1.9 trillion in total public debt makes the country too big to save. After rising to over 6% in recent weeks and stubbornly staying above that critical level, the yield surged by over one-half percentage point today to more than 7.25%. Just as important, the ten-year German bond, the regions safe haven, fell in yield to 1.72%. Clearly, the market is suggesting that Italy is not too far behind Greece in either being forced to restructure its debt, or default on its obligations.

European leaders ongoing crisis summit in Brussels, Belgium is the 13th such meeting since 2010. The ultimate resolution of the European debt crisis, repeatedly promised during the past year and a half, is now set to be announced on Wednesday. What are some of the central elements of the solution likely to be? Even though we are just two days from the self-imposed deadline, some of the important decisions have yet to be made. Frances President Nicolas Sarkozy insisted yesterday that more long hours of discussion were necessary before the European leaders could announce major decisions.

The French word dnouement connotes a form of final resolution of a problem or an issue. We may be approaching such an end point in the European debt crisis. After repeated bailouts of debt-ridden countries through the imposition of austerity and adding to debt levels-actions which only worsened the countries debt ratios-European leaders are discussing seriously, for the first time, the possibility of significant haircuts for creditors. Kicking the can down the road, the trite phrase used to describe the European policy reaction, may no longer be the path for debt-ridden economies.

The zero U.S. job growth also had an impact beyond its own borders. Even though U.S. markets were closed yesterday for the Labor Day holiday, Asian and European equity markets fell sharply on growing fears that the data release signaled the beginning of a U.S. recession. (Concerns about the solvency of the European banking system were the other reason for the market setback.) The United States and the European Union each account for about one-quarter of world GDP, and emerging markets cannot maintain global growth despite their faster pace of expansion.

We heard about the frailty of developed economies on both sides of the Atlantic. However, Bernanke seemed to suggest eventual additional monetary measures, rather than recommend that structural reforms carry the bulk of adjustments in the U.S. economy. And while the head of the IMF pointed to the inadequate level of European bank capital compared with the size of the sovereign loan losses they may experience, she was not yet ready to recommend that the European powers undertake measures to reduce the level of debt. Simply put, we are nowhere near achieving a successful economic stabilization.

As I have emphasized repeatedly in the past, none of these band-aid measures is likely to end the European debt crisis. Several countries of the region are excessively in debt, pure and simple. When that is the case, the solution ought to be a reduction in the level of debt through the exchange of existing debt for discount bonds, reduced-interest rate bonds, or equity. Unless the European powers recognize and act on this reality, European debt will continue to be a millstone around the global economys neck.

News from Brussels suggests that European Union leaders have reached yet another agreement to bail out Greece. For the first time since the birth of the Eurozone in 1999, the proposed plan contemplates a default on bonds issued by a Eurozone country, in this instance, Greece. Remember, as recently as last Friday, the European bank test results made no assumption of a default by a Eurozone member. Greece, Ireland and Portugal will also enjoy reduced interest rates on their bailout programs as part of the new solution.

Job creation still appears not to be a priority for the Obama administration. After the first year was spent implementing a comprehensive health care reform in the midst of a financial crisis, and bailing out financial institutions considered too big to fail, the emphasis switched to fiscal and monetary measures that had little direct impact on jobs.

The decision was made to implement new purchases of $600 billion in U.S. Treasurys by June 2011. The transactions would expand the balance sheet of the Federal Reserve to about $2.9 trillion, a multiple of the $800 billion dollar level it was at in September 2008. This paper examines how the countries which have been recipients of the newly created liquidity have responded to the Feds move. While the Fed explained that its purchase of securities was intended to make riskier assets, the excess liquidity also made its way to foreign countries to take advantage of attractive interest rates.

Portugal will be the third European country to be bailed out in recent months following Greece (May 2010) and Ireland (November 2010). It also follows a pattern of individual governments and the EU repeatedly asserting that no bailout is necessary, that the high bond yields and rating downgrades are unjustified, and that speculators are largely to blame for Europes problems.

During the early hours of Saturday, the major European powers met in Brussels and agreed on measures to resolve the long-simmering debt problems in the weaker economies. Although the meeting was considered to be preparatory for the European Union summit set for March 24 and 25, the surge in Greek and Irish debt yields, in particular, pushed the leaders to announce an accord. A closer examination of the terms of the treaty suggests, however, that this is just another temporary solution that may provide relief for a few days. It is unlikely to be a permanent solution.

Even though the unemployment rate declined to 9.4% in December from 9.8% in November, the drop was largely due to 260,000 individuals leaving the work force. Now, with the unemployment compensation extended as part of an agreement that President Obama reached last month with the Republican opposition, the unemployment rate will likely resume its climb toward the 10%-mark. Here are three suggestions to deal with the growing problem of unemployment in the U.S. economy.

The beginning of a new year is a time to make resolutions. It is also a good time to set out ones wishes regardless of whether they can be actually achieved during the following months. In that spirit, here are my top wishes for the U.S. and global economy during 2011. Achievement of even a few of them would help bring about sustainable economic growth as well as reduce the level of risk in the financial system.

I have had three recommendations in 2010: 1) Extend the Bush tax cuts of 2001 and 2003 for at least one more year. 2) Implement Free Trade Agreements (FTAs) with South Korea, Panama and Colombia all important U.S. trade partners. 3) Permit greater flexibility in labor markets.

The 440 billion ($617 billion) European Union bailout package approved earlier this year provided new loans to debtor nations from the EU and the IMF in return for pre-agreed austerity programs. Germany, the major creditor nation and the biggest single contributor to the bailout package, agreed on Friday to provide the fund permanent status, but only if the debt reduction cost were shared with private investors. A variation of the decision that Germany made last week is likely to confront President Obama during the next two years as the U.S. deals with its own bailout programs.

A key item on the agenda last weekend during the meeting of G-20 finance ministers was the U.S. desire to have member nations' current account deficits and surpluses limited to 4 percent of GDP. A country with a bigger surplus (e.g., China) would have to let its currency appreciate. The United States, however, cannot insist on deciding on the size of QE2 based purely on domestic considerations, accuse Chinese authorities of currency manipulation, and expect other countries to provide a level playing field for American exports all at the same time.

Senior monetary officials worldwide have complained about the massive inflows of capital into their financial markets resulting from expectations of monetary easing in the United States. One of the major pitfalls of quantitative easing is that beggar-thy-neighbor currency interventions do not result in increased growth for all participating countries. Instead, they sharply increase the risk to exporters and international investors and, eventually, dampen global growth.

The clamor from some economists for additional quantitative easing in the United States comes after two years and $1.5 trillion of such easing have already taken place. Similarly to the Japanese experience, the U.S. economy's growth has slowed to a crawl after just a few quarters of adrenaline rush due to increased liquidity. Even though newly minted cash has surged, bank lending to the private sector has not. And, again not surprisingly, U.S. banking sector profitability has sky-rocketed.

The unemployment rate is a leading indicator of economic activity in this business cycle due to the potent force of discouraged consumers, rather than a lagging indicator, as we have been taught in our economics courses. That, in turn, means that we cannot ignore the large number of jobless workers in the belief that economic growth will subsequently cure the problem we won't have sustained economic growth unless we lower unemployment first. The disappointing employment numbers last Friday are indicative of this trend.

With the Obama administration's $787 billion stimulus money mostly spent or committed, the fiscal deficit has risen and borrowing needs have gone up, but the private sector is still incapable of generating sufficient employment or economic growth. While the $8,000 first-time home buyer credit temporarily helped housing, and 'cash-for-clunkers' was a boon to the automotive industry and car dealers last fall, the end of programs like these has typically been marked by a falloff in demand.

Komal Sri-Kumar comments on US China relations, looking at how both sides view the appreciation of the RMB. Washington has lectured and Chinese officials have retaliated with their own diagnosis that the crux of the problem was lack of adequate regulation of U.S. financial institutions, and have suggested that the Obama administration should reduce the fiscal deficit rather than focus on the exchange rate. What Sri-Kumar believes is missing from this conversation is an understanding of the role played by exchange rates in balancing international trade.

Three myths continue to circulate regarding the prospects for U.S. economic growth. The first is that an increase in the fiscal deficit would have a Keynesian multiplier effect in boosting the economy. The second is that strong economic growth since mid-2009 is proof of the success of the stabilization plan. The third is that the ongoing European sovereign debt crisis will not impede a U.S. economic recovery, because U.S. exports to Europe are a small part of total U.S. exports, which in turn are not a huge component of U.S. GDP.

German taxpayers have started to view the European Union merely as a 'transfer union,' where they incur tax hikes and spending cuts in order to make transfers that enable their southern neighbors to maintain social welfare provisions. Sooner or later, the political willingness to continue this pattern merely in order to sustain a common currency will cease. At that time, the choice will be to reconstitute the euro area, or agree that weaker nations with debt problems need to reduce and restructure their debts rather than pile on more.

Even though the National Bureau of Economic Research, the unofficial arbiter of the start and end of U.S. recessions, has not yet decided that the most recent recession has ended, the consensus view is that the economy recovering. Positive developments notwithstanding, Komal Sri-Kumar expects signs of a renewed economic downturn to manifest themselves during coming months. The slingshot effect of monetary and fiscal stimuli has still been less than stellar given the steepness of the economic decline during 2008-2009.

The upward march of global equity markets in recent months is unsustainable. While U.S. corporate earnings have recorded healthy increases in recent quarters and, thereby, have been supportive of equity prices, the worldwide macroeconomic backdrop has continues to cause concern. The risks include, but are not limited to, a surge in the level of sovereign debt, a plunging dollar as foreign holders decide to cut their exposures in U.S. Treasury obligations, and a surge in U.S. Treasury bond yields.

Global markets reacted positively to the European Union's display of solidarity Sunday with debt-burdened Greece. Should Greece need a bailout, European finance ministers said, the country would be able to borrow up to 30 billion euros at about a 5 percent interest rate for a three-year loan. Assistance from the International Monetary Fund could add another 15 billion euros, for a total aid package of 45 billion euros. The eventual, sustainable solution, however, is to reduce Greek debt to a level that the Greek economy can service rather than pile on more debt.

The air is thick with allegations that China is manipulating its currency by keeping the renmibi fixed and undervalued with respect to the U.S. dollar. All of this is in anticipation of whether Treasury Secretary Timothy Geithner will designate China as a currency manipulator in his semi-annual report to Congress on trade practices. This designation could lead to new U.S. sanctions against Chinese exports. Ultimately, however, the key to success for U.S. authorities would not be public criticism of the United States' largest creditor, but a thoughtful discussion behind closed doors.

After weakening for most of the past decade, the dollar has appreciated significantly against the euro and the pound sterling, the two major European currencies, over the past three months. This is due more to the weakness of European currencies than to the strength of the dollar. Fears of stagnation in Europe, uncertainties over upcoming U.K. elections, and concerns that Portuguese and Spanish debt sovereign may come under attack by hedge funds have all dragged on European currencies. Compared to this turbulence, the U.S. economy seems like a safe haven.

Voters in Iceland rejected a referendum on a $5.3 billion debt repayment arrangement with British and Dutch depositors in the failed Icesave Bank. Iceland's real GDP declined by 7 percent in 2009, and voters feared that the debt burden, along with austerity measures from the IMF, would make economic prospects even worse. Similarly, whether Greece receives loans from France and Germany or meets its $31 billion April and May funding requirements from bond investors, the country's debt burden will probably increase and constrain future growth prospects.

Eurozone members may be reenacting the story of the Trojan Horse in their efforts to rescue Greece from a debt crisis. The bailout brings unintended consequences that could weaken the entire eurozone. Greece shows no indication that it will take the necessary austerity measures to keep its fiscal house in order after a bailout takes place. A Greek bailout could make Spain and Portugal think that they are entitled to a similar financial rescue. And a bailout could feed resentment from German taxpayers, who would bear much of the burden.

Too big to fail remains the governing precept of the United States since the bank bailout. A similar drama is now playing out surrounding the Greek debt crisis. Even though a bailout of Greece seems to be the quick solution, it will likely resolve little in the long run. A transfer of German or French taxpayer dollars to Greece would ultimately increase the troubled countrys debt load. This would fuel Greek worker resentment at austerity measures, while failing to produce the economic normalization or growth that Europe needs.