While that may finally provoke a “dramatic ECB treaty change” or “fiscal European union,” even that might not be enough to stop this crisis from dragging on for years to come.
We think widespread austerity will mean that the European recession intensifies as 2012 progresses. Our shorter cycle theory has always targeted 2012 as a recession year and, more worryingly, the parallels to the 1930s are building. The longer a country stayed on Gold in the 1930s, the longer it took for their economy to pass its 1929 activity peak. If we’re correct, by the time we enter H2, the market might start to widen aggressively as it may conclude that austerity is making it harder for countries to grow out of their debt burden. There may then be doubts over domestic willingness to continue to pursue such policies and whether the ECB has the mandate or the desire to again step up purchases sufficiently to arrest declines without some kind of dramatic ECB treaty change or cast iron move towards a fiscal European union…
By the second half of 2012, we think all outcomes will again be back on the table. Restructurings, defaults, haircuts, full fiscal European Union or extreme levels of money printing will all likely be possibilities. It might be that unless the ECB has bought somewhere close to an extra trillion Euros of European Government bonds by the time we write 2013’s outlook, we may be seeing the endgame of ‘thinking the unthinkable’. Even if they have, we think this crisis will still continue to run and run.