Won­der­ing what is next for Europe? Don't be. With Jur­gen Stark, aka the last real hawk at the ECB, gone, here comes "the print­ing." SocGen's Dylan Grice explains.

From Soc­Gen:

Sup­pose that Italy or Spain get caught up in the whirl­wind like Greece, Ire­land and Por­tu­gal, as threat­ened to hap­pen last month. Maybe the Ital­ian polit­i­cal sit­u­a­tion dete­ri­o­rates, maybe Ire­land defaults, maybe Greece will go rev­o­lu­tion­ary, or maybe an ill-advised way­ward com­ment from an influ­en­tial Euro­pean politi­cian will spook mar­kets and send them into renewed tail­spin. We don't know which of these will hap­pen, if any. All we know is that these are some of the many plau­si­ble trig­gers for a fur­ther dete­ri­o­ra­tion in this frag­ile situation.

Let's say one of those trig­gers is acti­vated, lead­ing to an inten­si­fi­ca­tion in the runs on the secu­ri­ties of euro­zone gov­ern­ments and banks, prob­a­bly Ital­ian and/or Span­ish, but who knows? In all like­li­hood, every bank will get fur­ther pum­melled regard­less. And let's also say that the panic is fuelled fur­ther by con­cern that Italy and Spain's multi-trillion-euro bal­ance sheet banks are sim­ply too big for their already fis­cally strained gov­ern­ments to save. Fear that they will try cre­ates more panic in the mar­ket for those gov­ern­ment bonds, the via­bil­ity of the euro is per­ceived by the mar­kets to be threat­ened and so all eyes switch to Ger­many and France to pro­vide fur­ther bail-outs.

But then every­one real­izes that France and Germany's own banks are being dragged down. And, in France and Ger­many at least these banks would take pri­or­ity over those of other coun­tries. So the trillion-euro bank bal­ance sheets of many of the eurozone's finan­cial insti­tu­tions seem too big for even the core gov­ern­ments to save. Runs develop in the core gov­ern­ment bond mar­kets too as investors take fright that they might try. Mean­while, the con­tin­ued absence of any coher­ent pan-European polit­i­cal lead­er­ship ensures any oppor­tu­ni­ties to get ahead of the panic are missed, and so one/some Euro­pean banks fail.

Thus the entire finan­cial sys­tem fails. The 1931 Credit Anstalt cri­sis is rerun and the depres­sion that fol­lows is too much for aus­ter­ity fatigued periph­eral euro­zone mem­bers, whose elec­torates suc­cumb to the siren call of  anti-euro pop­ulists promis­ing deliv­er­ance from the eco­nomic mis­ery imposed by Berlin. The euro ends not with a whim­per, but a bang ....

Now, per­son­ally, I don't think this will hap­pen. I think the ECB will get the print­ing presses rolling before we get to the stage where mar­kets seri­ously panic over the sol­vency of the eurozone's core, or of its banks. And when I say I expect the ECB to get the print­ing presses rolling, I mean QE of the unbri­dled unster­il­iz­able sort, and of which The Ben Bernak is so fond.

This action won't be taken lightly. In fact, I doubt it will be taken at all until the mar­ket puts a gun firmly to the ECB's head and forces it to choose between its two great loves: the euro or its Ger­manic belief in hard money. "You can't have both" the mar­ket will say, as it cocks its gun and slowly squeezes the trig­ger. And my guess is that the ECB will let its prin­ci­ples go and sell the strat­egy to Ger­mans as a hard-money sab­bat­i­cal. After all, if the hard-money Swiss National Bank can com­mit to unlim­ited money print­ing, so too can the ECB.

I also sus­pect such an action would be the final kick of the can. Money print­ing buys time and noth­ing else. But I think it could buy the euro­zone quite a lot of time, cer­tainly enough to be open-minded towards own­ing the cheap assets the episode might throw up. Let's face it, equi­ties would likely become very cheap in the sort of panic that would force the ide­o­log­i­cally Ger­manic ECB to print with the aban­don of a Ben Bernanke.

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