Will they, won’t they…well, we’ll soon know what the ECB intend to communicate to markets with regard to the ‘seniority’ issue as well as the ’modalities’ of the proposed bond buying program. Ultimately though, the Eurozone is a coin with two sides. The market has latterly focused almost exclusively on the ECB. What actions it may take, how much liquidity it may, or may not, provide. This represents just one side of the equation; the provision of liquidity. This is a very effective life support system, but does very little for long term patient recovery and can only be a short term solution that buys time.
The other side of the coin, and one that markets have had the luxury of ignoring recently, is structural reform, political direction and leadership. This is much slower moving than monetary policy, but does set the direction and speed of central bank actions. As the hysteria from Thursday’s ECB pronouncements dies away the focus will switch back to all those unresolved and open questions: will there be a Euro wide banking supervisor in place before year end, which banks will be supervised, what will be the relationship between national supervisors and the ECB? Not to mention all the discussions around enforcing a fiscal compact, setting up the European Stability Mechanism (ESM) and competing national visions of what ‘Europe’ is.
What does this mean for markets? Probably a welcome bout of volatility…great news for those with a research driven and globally integrated investment process.