More than a year after Greece received a USD158 billion bailout package from the EU, the nation’s debt crisis continues to roil Europe. Meanwhile the peripheral economies of Portugal, Spain and Ireland may be in peril. German pundits have voiced frustration at their profligate neighbors and an isolationist party finished third in Finland’s recent national elections. The spirit of European unity is wearing thin.

However, Ireland’s economy has flagged after the government imposed strict austerity measures. This has led analysts to argue that forcing Greece to impose similar measures may be counterproductive, particularly as banks on both sides of the pond have significant exposure to debt issued by PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations. EU policymakers are caught between a rock and a hard place.

In the US, May’s employment report showed that only 54,000 jobs were created in the month due to weakness in the retail, construction and automotive sectors. Housing data released last week showed that real estate prices continue to fall in many parts of the country; the Case-Shiller Price Index plunged below levels last seen during the 1920s. On top of that, many economists have predicted that the price of gasoline will climb above $5 per gallon this summer, threatening retail sales growth.

US politicians have not inspired confidence in the markets. The Obama administration and House Republicans are locked in a battle over raising the nation’s debt ceiling. The Treasury Department estimates that the government will run out of money in early August if the debt ceiling isn’t raised. This outcome would represent a technical default and could undermine investors’ confidence in US Treasury bonds.

Republicans have demanded that any bill to raise the debt ceiling be accompanied by deficit reduction measures. Few would deny that reducing the deficit would benefit the economy; it’s estimated that a $4 trillion deficit reduction would produce an additional 1 percent in annual gross domestic product (GDP) growth. But the Democrats’ counter argument also carries weight. Democrats have argued that any spending cuts could stall the already-sluggish rate of economic growth, especially as the second round of quantitative easing winds to a close this month. Many economists have already lowered their forecasts for US economic growth in 2011.

The debate over the debt ceiling reflects two fundamentally divergent views on how to ensure the health of the economy. But this isn’t an intractable problem. We’ve seen similar debates each time the US has raised the debt ceiling, and the two sides have always reached a compromise. The current debate is nothing more than the usual political theater and cooler heads will eventually prevail.

Although the latest economic data is troubling, it doesn’t foretell another recession. Last month’s employment data was influenced by seasonal factors as well as supply chain pressures resulting from the Japanese earthquake and tsunami in March. And there were bright spots in the real estate data; prices stabilized in about half the markets that comprise the Case-Shiller Index.

The odds of another recession are long. But investors should nonetheless gird themselves for a textbook market correction this summer. Trading volumes are typically light in the season and any bad news could depress markets. I encourage investors to view any correction as a buying opportunity. However, those seeking to preserve capital should shift their portfolios to a more defensive posture.

Gold prices have flat-lined in June, but Income and Hedges Portfolio holding SPDR Gold Trust (NYSE: GLD) has posted an almost 8 percent gain year to date. Although market watchers will continue to debate the sustainability of gold prices, the yellow metal will continue to benefit from safe-haven buying.

Cautious investors have already sought shelter in Treasury bonds; the yields on 10-year Treasuries fell to fresh lows at the end of May. We recommend looking closer in on the maturity ladder as worries over the US budget could push real interest rates higher.

IShares Barclays 3-7 Year Treasury Bond (NYSE: EMB) has a 4.8 year average weighted maturity as investors have sought out shorter-term bonds. The fund will be cushioned against any move in real interest rates. It will also serve as a hedge against market volatility while providing shareholders with a 1.9 percent yield.

Although we don’t recommend hiding out in gold and Treasury bonds, conservative investors should continuing buying SPDR Gold Trust and iShares Barclays 3-7 Year Treasury Bond at current prices.