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Sequence This

Last Thursday (November 24th) I posted 'Inferring the truth' - and suggested a Eurozone 'solution' (of sorts) was in the making and given the market's sentiment a sharp rally was highly probable.

I wish I'd taken all (not just half) of my own advice.

Now we've seemingly spun a full 180 degrees what's next?

Discount the EFSF and other proposals - there'll be a lot more more fudge and fuddle - and you can see the outlines:

 - The Germans (and the French) are driving for full blown - sanctions, veto's et al - fiscal union;

 - They will try to circumvent the democratic (political/referendums) process;

 - We will hear a lot more about the Schengen Agreement, Protocol 14 and other legalistic maneuvers;

 - The minimum objective (December 9th) is that the 'core' (& Italy's unelected government) sign up.

This is all very plausible.

But will it provide the 'political cover' - enough crime and punishment - for the Germans to sanction greater ECB involvement &/or the issuance of some type of 'stability' bond?

Well, that depends.

How many countries will sign away their fiscal independence without any democratic mandate?

How many won't?

Is the ECB ready to commit? And to what?

Will the German Constitutional Court (& others?) re-enter the arena?

I could go on, but the point is obvious:

Fiscal union is the end-game and it probably does unleash the ECB, but getting there - legally? - with all 17? - is going to be extremely difficult.

Either way the problem (shifted onto the ECB's balance sheet) remains and Europe faces a grim (austere)   year or two (if its lucky.)

I see two scenarios:

(1) Markets rally on, European equities complete 'a-b-c' (.618 fib) corrections to the 2011 sell-off into year-end, and a new bear market begins in early 2012.

(2) Markets fail here and it all unravels very quickly.