Three words changed the course of the Eurozone economy when Mario Draghi, president of the European Central Bank (ECB) spoke to investors in London five years ago today.
In the landmark 2012 speech Draghi said he would do “whatever it takes” to preserve the euro area.
After a pause for dramatic effect, he added, with uncharacteristic clarity: “Believe me, it will be enough.”
It was enough: so much so that the International Monetary Fund (IMF) warned yesterday the ECB should tread carefully even now in reducing the pace of bond purchases, so crucial have they become to the Eurozone economy.
In the aftermath of the speech, delivered at London’s Lancaster House (the same location where Prime Minister Theresa May set out her plans for Brexit), Draghi’s ECB cut interest rates to zero per cent and below and unleashed a massive load of quantitative easing bond purchases to stimulate lending and growth.
Since then it has hardly been plain sailing: the debt crisis in Greece continues to flare up every time it needs a renewed bailout; political turbulence seems to surround every election on the continent; and inflation is still weak across the Eurozone.
Yet fundamentally, five years on, Draghi’s speech did its job: the Eurozone stayed together. The Eurozone debt crisis hinged on the perceived unsustainability of government debt for some of the countries heaviest hit by the crisis. Defaults would likely have led to the messy break-up of the euro, triggering a bout of deeper pain for a global economy still reeling from the global financial crisis.
Draghi’s speech instead prompted money to pour into the government bonds of economically weaker European countries such as Italy, Spain and Portugal. For instance, the yield on the Italian 10-year bond, which moves inversely to its price, fell from more than seven per cent in 2011 to around 2.1 per cent in 2017.
It was “an iconic show of commitment and political will,” says Andrea Iannelli, investment director, fixed income, at Fidelity International. “Draghi’s verbal commitment, the rate cuts that followed, and the public sector purchase programme introduced in March 2015 were all instrumental in reversing the upward spiral in peripheral yields.”
In spite of the possibility of political ructions still to come (chief among them being Italian elections) there is a new-found economic confidence on the continent, at least some of which is down to the ECB, says Chris Bailey, European strategist at investment manager Raymond James.
“It has to be perceived as a success because – Brexit excluded – the EU is still together,” he says. “The current noises on reform and optimism could only have occurred under this stimulus.”
But some things still stick out. Foremost, the central bank’s crucial inflation target. Although consumer price inflation in the Eurozone briefly hit two per cent in February it proved to be short-lived. “Ultimately the ECB wants to get [inflation] back up to its two per cent target,” says Peter Dixon, an economist at Commerzbank.
He added: “If anything it has been running the other way of late.”
The slow progress in boosting inflation to something sustainably approaching two per cent is the main obstacle to tighter monetary policy, although a quickening recovery may provide some leeway for tightening to placate some critics.
“The ECB will need the cover provided by stronger economic growth” to tighten monetary policy, says Dixon. That will likely take the form of a “slow and protracted exit” from asset purchases, which are likely to be extended beyond their current pace of €60bn (£54bn) per month up until December.
Draghi has hinted at a decision on reducing, or tapering, its asset purchases in the autumn, with a classic central banker’s ambiguity.
Yet even if purchases slow or stop at some point next year, there is a long way to go until the task Draghi set himself five years ago is finally finished.
Ianelli says: “Arguably, the ECB has singlehandedly steered the Eurozone out of a storm and into much calmer waters.
“Looking ahead, however, there are still some clouds on the horizon, and the ECB should avoid letting go of the helm just yet.”