It is clear to me now, how the EU and ECB will handle their situation. The whole situation reminds me of the Boy Who Cries Wolf.
The ECB retracted rumors of 'printing money', and the markets sell off.
During this ECB induced sell-off, lets keep a few things in mind:
1. the ECB has the ability to stem the sovereign debt issues, now that Austerity is happening.
2. the ECB further facilitated banks to prevent a large systemic risk. (There is zero risk of a credit event, even if a sovereign defaults.)
The retraction of the rumor allows the markets to assume a potential sovereign default. That is a risk, and the market is appropriately discounting it. But we have seen this before, many times in the last 5 months.
Here is the story for the last 5 months:
The ECB threatens. Markets react negatively. Local governments continue to commit to fiscal responsibility. Once commitments are reassured, "someone" enters the market and buys sovereign debt.
The only difference to this story is that a far greater support mechanism was given to the global banks to prevent a credit event.
I do not see a different scenario playing out here. The ECB will continue to play its 'hard money' role to ensure fiscal responsibility, but will enter the markets when there is enough negativity.
Its an interesting game, but the markets are adjusting to it. Over time, they will see this game more clearly, and as the towns people did with the Boy Who Cried Wolf, these ECB threats will start to be ignored by the market participants.