Europe Uncertainty Continues as troika Returns to Athens

Europe uncertainty set to continue as troika returns to Athens, Greek PM cancels US trip, Ecofin meeting ends without progress, Merkel suffers another election setback, Bank of England quarterly bulletin set to increase calls for more QE.

Despite last weeks measures by central banks to bolster confidence in the banking system, it seems likely that events at the weekend in Europe could well keep the outlook uncertain.

The failure of EU leaders to come to any form of agreement in Poland merely serves to highlight the political paralysis at the heart of Europe as markets continue to dictate policy responses rather than the other way round.

The IMF troika return to Athens today to assess whether Greek politicians have done enough to reassure them that Greece will be able to meet its obligations for 2011 and 2012, with fresh measures to help balance the books. This is likely to keep investors nervous, given that Greek PM Papandreou has delayed a trip to the US at the request of his finance minister.

The delay until October of the next bailout tranche by EU leaders has prompted speculation that Greece could be on the verge of defaulting, and uncertainty about the political situation in Europe hasnt been helped by weekend events in Germany.

Angela Merkel suffered her sixth election defeat in seven this year after her party was beaten into second place in the Berlin state elections. More damaging than that was the wiping out of her coalition partners the FDP, who dropped to only 2% of the vote, and throws into doubt the ability of her to muster support going forward for the changes agreed at the 21st July meeting for changes to the bailout fund, which are due to be voted upon in the German parliament on September 29th.

In the UK, the latest Bank of England quarterly bulletin makes for sobering reading and paints a bleak picture as well as giving some indication of the likelihood of further QE. Although the report provides evidence that quantitative easing measures were effective in boosting growth, it points out that the effects of QE may be different if implemented a second time around.

The report warns that the economic circumstances for further asset purchases are "very different from those that prevailed in 2009, so it cannot be assumed that the effects will be the same."