The commentariat is in uniform agreement that large-scale EFSF leveraging and bank recapitalisation are needed to stem the Eurozone crisis. Could the opposite be true?

The view here is that the ECB has been a key driver of Eurozone woes by allowing the real money supply to contract from late 2010, compounding its error by raising interest rates this spring. Resulting economic weakness has undermined fiscal consolidation plans and, by extension, market perceptions of sovereign solvency.

Even a leveraged EFSF would be unable to offset the damage inflicted by continued deflationary monetary policy. A refusal to expand the facility could be the best way of forcing the ECB to change course. Market turmoil following such a decision could hand Sig. Draghi the bargaining power to overrule the Bundesbankers and cut interest rates while launching “proper” QE – a direct liquidity injection via large-scale bond purchases spread across sovereign markets in proportion to national GDPs (thereby avoiding the charge of a backdoor bail-out of peripheral miscreants).

Moving the goal posts yet again to require banks to raise capital ratios significantly over a short period, meanwhile, would lead to a renewed monetary squeeze, as demonstrated by the disastrous economic fall-out from the forced UK injections in late 2008.

Investors, perhaps, should hope for a “disappointing” outcome from the forthcoming summits, with any knee-jerk sell-off in markets providing a buying opportunity as the ECB is forced to launch rescue action. Conversely, initial euphoria in the event of a big headline package could fade rapidly if the price of “victory” is that Bundesbank deflationists remain at the monetary controls.