This week’s relief rally is likely a false dawn, because austerity advocates still haven’t conceded they’re wrong, writes MoneyShow.com senior editor Igor Greenwald.

Can we trust this latest stock-market reprieve? Can we believe that Europe is finally serious about fixing not just the widespread distrust of its banks, but the policies that condemn much of the continent to a permanent recession?

Of course not. This turnaround has been driven by the mere hint that Germany is finally willing to apply a tourniquet to stop the bleeding.

What happened was that German waffling had finally translated into an economic slowdown across the world, from Asian manufacturing hubs to Australian department stores and Brazilian farms.

When US Treasury Secretary Timothy Geithner flew to Europe ten days ago to plead for an American-style bailout for European bonds and banks, he could be dismissed as the presumptuous messenger of a political faction of a country with too many problems of its own.

But at last weekend’s meeting of the International Monetary Fund in Washington the Germans heard the same advice and pointed complaints from many emerging powers, as well as thriving (but worried) commodity exporters like Canada and Australia.

As wary as Berlin is of outside advice, it can’t afford to tick off the entire world, or to get blamed for sabotaging prosperity across the globe.

The markets turned so chaotic last week that even Germany could not ignore their message, as amplified by countries that put more stock in such indicators.

Hence Chancellor Angela Merkel’s belated embrace of Greece as an earnest and deserving penitent rather than a spendthrift grifter. And hence leaks that Europe is after all planning to leverage its bailout fund, just as Geithner had proposed.

Leaks are all they can be until Thursday, when German lawmakers will vote to expand the bailout fund to a previously agreed upon but clearly insufficient level. Merkel’s coalition allies won’t vote for the plan if they’re seen as writing Europe a blank check to guarantee unlimited purchases of Italian and Spanish debt.

So mum’s the word until the Germans sign on the dotted line, and maybe until all the other Eurozone parliaments do the same.

And if that was all it took, it might be time to declare victory and celebrate this week’s turnaround as a market sea change.

But the Bundesbank’s man at the European Central Bank is already kicking up a fuss about the leverage scheme, and a top German judge is suggesting that it would require a constitutional amendment.

Furthermore, at least one credit-agency official has indicated that leveraged guarantees would jeopardize the Germany’s AAA credit rating.

Even if we assume that all such opposition can be swept aside now that Merkel is seemingly on board, there’s the problem that leveraged guarantees address only the symptom of Europe’s sickness. Speculation against Italian and Spanish debt is rife because the austerity demanded by Germany is incompatible with growth, and therefore with those countries’ efforts to raise revenue.

Markets are speculating on the ultimate failure of German-mandated austerity as a fiscal cure. But Germany hasn’t even begun to wrestle with the fact that its prescriptions are at the root of the problem.

For the moment, traders just don’t care. It’s the end of the quarter, which tends to see institutional inflows into stocks, especially now that the market’s been so devalued relative to everyone’s bond holdings. A lot of people have been caught uncomfortably short.

Another earnings season is in the offing, and this reminder of the recent corporate prosperity also promises to take the mind off looming problems.

This relief is unlikely to last. There has been no fundamental change in the climate of austerity jeopardizing growth in Europe and the US, and the resulting stresses will continue to buffet the emerging markets trying to pick up the slack without overheating.

The economic situation is likely to get worse before it gets better. If this relief rally proves anything more than a fleeting blip, it will start resembling the one in the fall of 2007, when hopes that official concern would forestall recession proved misplaced.

I bought stocks Monday morning for family retirement portfolios I manage, because austerity isn’t going to hurt much—if at all—the likes of McDonald’s (MCD), Bed Bath & Beyond (BBBY), and Marathon Petroleum (MPC).

But if the S&P 500 manages to get above 1,200, it will make just as much sense to sell the instruments most at risk from a global economic slowdown.

In that vein, it was interesting to see that the biggest increase in short interest on the New York Stock Exchange in the first half of September didn’t concern a European bank or a US auto maker. No, the shorts were most excited about betting against iShares MSCI Pacific ex-Japan Index (EPP), more than quadrupling their bets against the ETF, according to Bloomberg.

That’s a fund with a 65% exposure to Australia, with Hong Kong and Singapore accounting for much of the remainder. Financials and materials are nearly two-thirds of the portfolio.

It’s a broad bet on growth across Asia, and it’s disturbing to see how eager the short-sellers now are to fade that trend.