One of the most famous sentences in the history of the Eurozone turns five years today: “Within our mandate the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. ECB’s chairman Mario Draghi words will be reminded for long as a balm to the euro crisis of 2012, but what real effect this discourse has had?
Five years ago the relatively short story of Europe as a monetary common place was about to collapse with Spain and Italy in a downward spiral reaching a point of no return. At that point Philippe Waechter Chief Economist at Natixis Asset Management says Draghi’s speech, delivered at London’s Lancaster House ,“made remarks in London that have changed the world”.
Waechter explains Mario Draghi did three things. First The ECB’s chairman said that the Euro area was a political construction.
“It was the result of countries’ will to live together. It has worked. The area has been in peace since WWII. This is the most important point for Europe. The euro currency is just a technical commitment. An important one but not more than that.”
Furthermore, after this sentence the ECB became the lender of last resort that a monetary construction needs. Until this moment the central bank had never played this role. In fact, the growth recovery is now strong, even Italy and Greece are now growing. Eurozone GDP growth should surpass 2% in 2017.
The second idea that Draghi gave was that if the currency was just a technical mean to improve the way the Euro area political framework worked then it had to continue. In the end, the role of the ECB was to save the Eurozone by avoiding a collapse of its currency.
The third point came few days later at the ECB monetary policy meeting with the creation of the OMT which allows the ECB to buy assets (public debt) mainly in Italy and Spain.
“Later in 2012 and after in 2013 the interest rate spreads with Germany decreased dramatically. This was the end of the main divergence within the Euro area. The ECB has been a game changer by avoiding the collapse of the European construction. Since then, economic policy leader is the central bank under the impulse of Mario Draghi. Progressively the fiscal policy has converted to a neutral stance. The Eurozone economic policy is now done in Frankfurt more than in Brussels.”
There is a strong case that Draghi’s intervention saved the euro zone in 2012, but is it certainly the euro zone much stronger now than it was in 2012?
The fact is that the debt crisis in Greece continues to burst every time it needs a renewed bailout, political turbulence seems to surround every election on the region and inflation is still weak.
Therefore, consolidating the future of the euro will require a third stage: the political. As said by François-Xavier Chauchat, Chief Economist of the Investment Committee at Dorval Asset Management:
“The good news is that this process has finally begun, thanks to Emmanuel Macron’s victory in France. In the immediate aftermath of the French elections, Germany and France have indeed agreed to open a new agenda of negotiations aiming at upgrading the institutional framework of the euro. No need to hold our breath: coming to a new compromise involving some forms of burden sharing and fiscal union will take a long time, and probably require a Treaty change.”