Will the ECB “ride to the rescue” or not? Nothing else seems to matter and the answer to this question will be the single biggest determinant to whether we can break the year highs or not in US stocks. I already have the answer – just not the exact timing.
Here’s a little fact about human nature that helps a great deal in explaining what is likely to happen in the Euro Zone: People will prolong the taking of pain until it is no longer physically or mentally possible. No one goes into a difficult confrontation until they are forced to, even bullies who love to fight will only instigate confrontations that look to be easy pickins.
The ECB will eventually do whatever it takes to “fix” things in the end but they won’t do it until forced to. The inherent problems of having weak economies and strong economies shohorned into one currency/monetary union will not be dealth with in 2011, maybe not even in 2012. That confrontation will wait, it is too painful right now.
What is required to push that off into the future? Bailouts, bazookas, money printing, treaty changes, technocratic governments and so forth. All of these things will happen, the breakup of the Euro will not right now. Maybe someday, but the history of humanity says that while there are still switches to flip and levers to pull, expect them to be switched and pulled.
Simone Foxman summarizes the non-action action that the duo of Sarkozy and Merkel kind of announced today (via Business Insider):
Here are the main points of other things they’re planning to do, that will be summed up in a final treaty outline by March 2012:
- Impose restrictions on the size of deficits and spending for governments.
- Involve the European Court of Justice in the oversight of budget commitments. They’ll have the power to oversee and determine when other EU countries can impose sanctions, but they won’t have the ability to veto budgets directly.
- Speed up implementation of the European Stability Mechanism to next year.
- Eurobonds, at least before treaty change, are not a solution. They said little about the European Central Bank.
- Measures to address the current status of the crisis will be announced at the EU summit on Friday.
Hear that? Forget the “solutions”. They’ve staved off the inevitable through at least March 2012. Confrontation and, ultimately, the breakup is sometime in the years to come. The stock market is saying “It will not be this day.”