Europe's Dilemma: "Probability Vs Impact"


When it comes to the future of Europe, one simply has to look at the foundations or the so called "euro-architecture" which as the past two years have shown us, are in dire need of strengthening lest everything topples over. Mere talk will no longer cut it. Simplifying things further, one can distribute the potential outcomes facing Europe along two axes: Impact, or an event's likelihood of actually doing something to change the current "sinking ship" status quo, and Probability, i.e., how much resistance, mostly political, will a given plan face, primarily from Germany which over the past year has fallen into its rightful place - that of Europe's fiscal, and monetary - because even the ECB will not move without German approval - paymaster. Obviously the two are inversely correlated. Whether or not the European crises ends, will depend on precisely which of the 9 listed outcomes below Europe decides upon (or all). However, as is well-noted on the chart, There are "No obvious game changers." Which is why anyone hoping for a Deus Ex, before much more pain is first experienced, as Deutsche Bank explained earlier, will be bitterly disappointed.

The scenarios are as follows, via DB:


1. Roadmap to fiscal union, long-term vision for euro to present/explain to markets the path to crisis resolution


  • Strenghten banks to protect financial system, maintain credit to the real economy;

2. ECB liquidity to ease bank funding

3. Direct recapitalization of banks (ESM/EFSF)

A. EU-wide deposit guarantee/banking union - end game, not short-term measures


  • Support countries with difficulties accessing markets

4. ECB bond buying, liquidity for banks to buy sovereign bonds

5. Extension of existing bailout programs

B. Eurobonds/redemption bunds - end game, not short-term measures


  • Increase firepower to reassure markets that we can credibly deal with deeper crisis (e.g. Spain, Italy)

6. Larger ESM

7. Banking license to ESM at ECB (increases lending capacity)


  • Support growth in short-term to mitigate negative impact from austerity

8. EU structural funds/EIB Capital increase/Project bonds

9. Policy rate cut by the ECB


Finally, and again from DB:

We think uncertainty will prevail over the months ahead. The most likely path, in our view, is that European leaders will continue with the incremental approach that has thus far failed to contain the crisis. While enough may be done to convince the ECB to step up its intervention, volatility and concern over Europe are likely to remain for the foreseeable future.

We agree.