Greece Gets the Boot, Germany Takes the Lead: Europe's Endgame

DURHAM, N.C. (TheStreet) -- There are two overwhelming forces driving volatility in the world: uncertainty about whether the U.S. can get its budget act together and uncertainty about what will happen in Europe.

I would argue that Europe poses a much greater risk -- and it is less understood in U.S. markets.

While it is frustrating that the U.S. is mired in partisan politics, at least there are only two groups of players, Democrats and Republicans. In contrast, Europe has 17 national governments, the European Central Bank, the European Financial Stability Facility, the Financial Stability Board, the European Council, the EU, the Institute of International Finance, the IMF, BIS ... get the idea?

Let me try to navigate through the mess in Europe.

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The ECB's Securities Market Program (SMP)

First, is the European Central Bank program to buy sovereign debt illegal?

The answer is yes and no.

1. Yes. The ECB cannot purchase sovereign debt directly from sovereign entities (primary market). Hence, they cannot bailout Greece, Italy or others in buying directly from governments.

2. No. The ECB is free to purchase on the secondary market. So, for example, if a commercial bank purchased some Greek sovereign debt, the ECB through its Securities Market Program can purchase that debt.

The ECB has been quite active in that market and has purchased 186.85 billion euros as of Nov. 11. These are called "Euro outright" operations. You can track the weekly operations.

A little background. The Governing Council of the ECB established the SMP on May 9, 2010. The formal document is dated May 14, 2010.

Consider two excerpts from the preamble (my emphasis added throughout):

"... in view of the current exceptional circumstances in financial markets, characterized by severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term, a temporary securities markets programme (hereinafter the 'programme') should be initiated. ... The programme's objective is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism."

It is pretty clear to me that the goal here is the conducting of monetary policy. In addition, the sole stated goal of the ECB is "price stability." This is a really important point. The U.S. Federal Reserve has two goals: price stability and full employment. The ECB only has the former goal.