Draghi’s ‘Whatever It Takes’ Still Works as Euro RevivesSimon Kennedy and Jeff Black
Mario Draghi finally has reason for cheer as a new year begins.
Eighteen months since the European Central Bank president declared he would do “whatever it takes” to protect the euro, fresh signs are emerging that his ad-libbed lines in a July 2012 London speech still serve as a potent force.
The confidence Draghi engendered helped dissipate a crisis that brought the very existence of the euro into question. Even onetime single-currency skeptics such as Nobel laureate Paul Krugman and economist Nouriel Roubini praise Draghi for reviving his region.
“Draghi did the bulk of it,” Krugman, who in November 2011 speculated that a euro breakup had “become all too thinkable,” said in an interview in Copenhagen yesterday. “It’s pretty clear that the ECB has been decisive in alleviating the European situation.”
Among the reasons to turn upbeat: Ireland this week sold bonds for the first time after graduating from a three-year bailout program. Portugal and perhaps even Greece may soon follow to market. Yields on Spanish 10-year government debt fell to the lowest since 2009, the Stoxx Europe 600 Index this week reached its highest in almost five years and a euro bought the most dollars in three.
A year on from the longest recession in its history, the euro-area economy is healing and governments are easing up on budget cuts. Data this week showed retail sales gaining the most since 2008 in November, and confidence increased more than economists forecast in December. In the ultimate rejoinder to those who once predicted a splintering of the currency bloc, Latvia this month became the 18th euro nation.
“We want to see confidence staying for a relatively long time before we can say we declare victory,” Draghi told reporters yesterday after chairing a meeting of ECB policy makers in Frankfurt. “I would say things are slightly better,” he said, and the recovery had “gone from being based exclusively on export growth that is very gradually extending into domestic demand.”
The future isn’t without risks, as the 66-year-old was at pains to stress as he said “downside risks” to the economy remain. The ECB strengthened its pledge to keep interest rates low for as long as necessary. Draghi said it could take “further decisive action if required.”
The ECB projects growth of just 1.1 percent this year; at 0.8 percent in December, inflation is less than half what the central bank considers price stability. Prices are shrinking in Greece and Portugal as well as Latvia and Cyprus; unemployment in the region is at a record 12.1 percent.
Lending to companies and households shrank for the 19th straight month in November; lawmakers are still at odds over how best to devise an umbrella over the continent’s banks. Germany’s Constitutional Court could still rule Draghi’s bailout program breaks the law.
“There’s too much complacency about Europe,” former U.S. Treasury Secretary Lawrence Summers said in a Jan. 4 interview.
Even after crafting its still-untapped bond-buying program six weeks after his celebrated speech, cutting its benchmark interest rate to a record low 0.25 percent and extending cheap long-term loans to banks, Draghi’s ECB may have even more to do to beat back deflation, said Andrew Bosomworth, managing director at Pacific Investment Management Co. and a former ECB economist.
The ECB could start charging banks for parking cash in its coffers overnight or issue more loans to encourage them to lend. A Fed-style asset-purchase program could be in the offing.
“Certainly if we were to have an unexpected negative shock that leads to growth coming out on the weaker side or inflation failing to pick up then I think we are looking at the ECB having to adopt quantitative easing,” Bosomworth told Bloomberg Television’s “The Pulse” with Francine Lacqua yesterday.
Draghi has nevertheless known much worse than the current state of affairs since swapping the helm of the Bank of Italy for that of the Frankfurt-based ECB in November 2011.
A year ago, he had the recession to contend with; 12 months before that he was facing questions about the composition of the euro. That specter came after two years of financial-market turmoil and international rescues, which would eventually encompass five nations and run to 496 billion euros.
“The light at the end of the tunnel has been visible ever since the ECB defused the euro crisis,” said Holger Schmieding, chief economist at Berenberg Bank. “At the start of 2014, we can see more than just light.”
While Draghi’s predecessor, Jean-Claude Trichet, was praised for the ECB’s swift response to the brewing financial crisis when it injected cash into markets to solve a credit crunch in August 2007, it was later criticized for keeping rates too high.
Draghi, who once said “friends tell me that I rarely shy away from impossible tasks,” has displayed greater brio and less interest in finding consensus among the ECB’s policy-making committee. Germany’s Bundesbank objected both to November’s rate cut and the bond-buying backstop.
“The ECB under Draghi has been more proactive than the ECB under Trichet,” Nouriel Roubini, chairman of Roubini Global Economics LLC in New York, said in an interview. As recently as 2012, Roubini predicted Greece would depart the euro.
Jim O’Neill, a former colleague of Draghi when both worked at Goldman Sachs Group Inc. in the early 2000s, was at London’s Lancaster House -- later used to represent Buckingham Palace in the television series Downton Abbey -- on July 26 2012, when the central banker laid down the gauntlet.
“The ECB is ready to do whatever it takes to preserve the euro,” Draghi told the audience, gathered to discuss U.K. business opportunities on the eve of the London Olympics. “And believe me, it will be enough.”
Afterwards O’Neill went to congratulate Draghi and then joined fellow guests discussing the speech’s contents over coffee. “It really surprised people and took a while for its meaning to dawn,” he said.
When it did, Europe was a buy again. Purchasing Greek bonds that day would have earned investors a 370 percent return, based on the Bloomberg Greece Sovereign Bond Index. Ireland’s earned 27 percent and Portugal’s 42 percent, while U.S. Treasuries lost 3.9 percent.
“It was a huge turning point,” said O’Neill, who last year stepped down as chairman of Goldman Sachs Asset Management and is now a Bloomberg contributor. “As for how markets behave it’s still one of the most important things out there for the euro area.”
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