At the beginning of the year, the long-term refinancing operation (LTRO) provided the liquidity necessary for us to believe that the banks’ funding problems had been pushed down the road by two to three years. However, there has been no underlying solution as to how we recapitalise those same banks.

The lack of recapitalisation pushes up the weight of the responsibility of the sovereigns to support their banking system and the sovereigns themselves are already in difficulty.

Originally, LTRO plus an austerity package were two of the levers that were designed to keep the euro on a straighter and more solid path in the future. However, LTRO has not addressed the recapitalisation problem of the banks. Added to this, the electorate is increasingly standing against the austerity measures that were originally envisaged.

Those austerity measures lead to diminished growth prospects and those lower growth prospects amplify the problems that the sovereigns have. Most recently, the Greek election, where a government failed to be formed, brought all of this to the fore with the question about whether or not Greece will stay in the euro.

It’s important to remember that everyone would be better off if Greece actually did manage to stay in the euro and the Greeks themselves largely support being in the euro. However, that does not mean that they won’t have to leave by some unforeseen accident of policy.

We are stuck in this cycle of crisis followed by policy response. Right now we are in a crisis phase. We will get some sort of policy response in the next few weeks, before the Greek election or around it. Ultimately, though, the bank recapitalisation problem is not going away and someone will have to pay for it at some point. It’s most likely that ‘someone’ will be European taxpayers, backed, of course, largely by Germany.

To date, Germany has staunchly defended the austerity measures and has wanted other southern European governments to follow them strictly.

However, it is clear now that the rest of Europe is against those austerity measures and it remains to be seen what Germany does in response to this. We’re likely to see continued volatility of this nature. Investors at the moment are not putting all their money to work. People have cash waiting to be invested but they’re concerned about the volatility they’re experiencing in the marketplace.

That means with low volumes you can still see wide price swings. We’re likely to get some form of policy response that will probably underpin markets for a while.

At the end of the day the problem will not be resolved until we see capitulation from either the ECB or the German electorate.

David Jacob is chief investment officer at Henderson Global Investors