Five years since Mario Draghi delivered his speech around ‘Whatever it takes’ to save the Euro.

July 26 marked five years since Mario Draghi delivered his speech around ‘Whatever it takes’ to save the Euro.

In retrospect, were Draghi’s concerns founded, and what has been the lasting impact of the speech been on the markets?

David Lafferty, Chief Strategist, Natixis Global Asset Management:

Draghi’s “…whatever it takes” speech was a seminal moment in the relatively brief history of the Eurozone. With Italy and Spain reeling from austerity, sovereign yields across Europe’s periphery were beginning to spiral upward to unsustainable levels.

The economic collapse of either country could have unleashed a chaotic disintegration of the Eurozone. Draghi’s proclamation backed by the full force and effect of ECB was enough to both counteract the fear of contagion and extend the horizon under which new policy tools like the ESM and OMT could be implemented.

In simple terms, Draghi put the genie back in the bottle and gave the struggling peripheral nations some much needed breathing room.

Draghi’s actions in the summer of 2012 highlight several lessons for policy makers:

One, risk premiums and investor behavior are as much about confidence as they are economic fundamentals. Leadership wins in a crisis.

Two, words alone aren’t enough. Confidence has to be backed tangible policy action. In this case, unveiling the ESM and OMT programs that summer put a credible and overwhelming policy framework around Draghi’s words.

Three, time is an important asset in a crisis. Economic woes cannot be solved overnight. However, decisive action can calm markets and allow a longer window for policy tools to take effect.

Today, the Eurozone is showing the most economic promise since before the 2008 Global Financial Crisis. If the Eurozone is truly on a sustainable path to expansion, much of it is the result of Draghi’s leadership five years ago.

Philippe Waechter, Chief Economist, Natixis Asset Management:

Five years ago, Mario Draghi made remarks in London that have changed the world.

When he spoke in London on July the 26th 2012, the Euro area was in its deepest recession since WWII[1] and two important countries, Italy and Spain, were following a non-sustainable trajectory that can be described as a deep recession with high real interest rates. These problems came from the European decision to follow austerity policies. These latter dramatically reduced domestic demand but without having a strong impact on public finance.

So the main question for Italy and Spain was the date of their exit from the Euro area; not if but when. An exit from these two countries would have led to a collapse of the Eurozone. This would have destabilised the world economy.

Five years ago, in London, Mario Draghi did three things:

First he 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.

The second point is the following: if the currency is just a technical mean to improve the way the Euro area political framework works then it has to continue. The collapse of the Eurozone (after an exit from Italy or Spain or another country) would have been a source of political instability in Europe and probably the end of most European institutions. The role of the ECB was to save the Eurozone by avoiding a collapse of its currency.

The famous sentence “whatever it takes” (the whole sentence is “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”) explains this new mission. 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. It’s a fracture in the European institutional framework.

In a situation where governments didn’t know what to do, the ECB became the leader under the auspice of Mario Draghi.

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. This was enough to reduce tensions on these two countries.

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.The QE strategy was consistent with this new ECB framework. It had to create the necessary impulse that would provoke the recovery. It has worked with all the instruments used in this non-orthodox monetary.

The European Central Bank has been the channel for a smooth adjustment in the most important financial crisis since WWII. Its job is now almost over as the growth recovery is now strong. It just has to keep its accommodative monetary policy in order to ease the needed political adjustment. The next step of the Eurozone institutional construction is political. It’s time for government to take the relay.

We will forget a lot of ECB presidents, past and future, but Mario Draghi will remain as the one who saved the European construction.

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