We’re watching the problems in the European Union unfold and can only speculate how far the contagion can spread. The credit market is increasingly betting on turmoil in the E.U. as the spreads between the countries running high budget deficits, such as Greece, Portugal and Spain, have widened dramatically in recent weeks against those of the more fiscally responsible nations like Germany and France.

The architects behind the E.U.’s monetary union failed to institute a mechanism for enforcing compliance with debt ceiling targets. So while the Greek delegation to Brussels promises the rest of the E.U. the country will behave itself, its track record, coupled with vocal political opposition at home raises serious doubts that any real progress will be made with its belt tightening.

The E.U. has relative few options at its disposal. On one hand, while Greece represents only 3 percent of the E.U.’s GDP, the country is on the hook to many banks across the continent. So simply booting it from euro-land, which would force Greece to bring back the drachma and precipitate a default on its debt, isn’t a palatable option.

On the other hand, bailing out the country would set a precedent and other nations would likely soon line up for aid. This is the more likely scenario to unfold, even if it, too, isn’t agreeable. It remains to be seen how things will play out, although most likely the E.U. or the European Central Bank will step in to backstop Greek debt or the IMF will come in with low-interest loans and demands for austerity measures. Regardless, it’s hard not to draw too-big-to-fail comparisons to our own financial system in 2008, only this time it’s occurring at the sovereign level.

While European stock markets had come under pressure in recent sessions, they’ve rallied today. This is most likely because of widespread assumptions that a solution will be found relatively shortly. Of course those assumptions could change in a hurry if no bailout materializes.

Our short-term stock market indicators continue to suggest that U.S. shares will remain under pressure. Europe’s troubles and their potential to adversely affect economies on both sides of the Atlantic are an obvious cause of that expected weakness, but continued signs our economic difficulties here could also have an adverse impact on our market.

In the near term what’s bad for the euro is good for the dollar. Just keep in mind that our public finances are pretty much on par with Spain’s. So the dollar’s rally is likely to be only temporary. Also be mindful that as with the U.S., the cure for Europe’s woes is likely to be inflationary.