By: Josh Pritchard
July 26, 2017 marked the fifth anniversary of European Central Bank (ECB) President Mario Draghi’s fateful statement to a panel discussion in London that had gathered to discuss the future of the Eurozone. At the time, there were concerns that Europe’s currency union could collapse as the result of massive debt burdens held by various member state governments and by government-supervised member state banks. Draghi’s demonstration of resolve succeeded in calming markets and helped lay the groundwork for the ECB’s large-scale bond repurchasing program. Today, economic conditions throughout Europe look markedly improved.
Within our mandate the ECB is ready to do whatever it takes to preserve the euro. And believe me – it will be enough.” – Mario Draghi, European Central Bank President, July 26, 2012
Remembering the Euro Crisis
“Draghi’s speech was a seminal moment,” says Natixis Investment Managers Chief Market Strategist David Lafferty; “the economic collapse of Greece, Italy, or Spain could have unleashed a chaotic disintegration of the Eurozone.” “Draghi’s proclamation,” according to Lafferty, “put the genie back in the bottle” by counteracting the fear of contagion and providing breathing room for struggling economies on Europe’s periphery. He notes that the containment of the crisis did not result from words alone and that Draghi’s resolve was backed by “tangible policy action.”
The Eurozone Renaissance
François-Xavier Chauchat, Chief Economist and Investment Committee member at Dorval Asset Management, believes that Draghi accomplished more than just positioning the ECB as a lender of last resort. The speech, he says, “was only the first stage of a long process leading to the renaissance of the Eurozone. The second stage, an economic one, took much longer.”
Chauchat suggests that consolidating the future of the Eurozone will require a third stage – political convergence. “Coming to a new compromise involving some forms of burden sharing and fiscal union will take time,” says Chauchat; “the good news is that this process has finally begun.”
“We will forget a lot of ECB presidents,” says Natixis Asset Management Chief Economist Philippe Waechter, “but Mario Draghi will remain as the one who saved the European construction.” Waechter suggests that the ECB’s role as arbiter of the crisis is “almost over, as growth recovery is now strong.” Like Chauchat, Waechter believes the final recovery phase will be political. “It’s time for government to take the relay,” he says. On July 25, Greece issued a new round of 5-year bonds, its first since 2014. The country is expected to undertake additional bond issuances as its bailout program with International Monetary Fund winds down. Improved economic indicators out of Greece follow trends seen across Europe over the first half of 2017. “European equities should see ongoing demand as we move on from political risk, with improving growth, better earnings, and more attractive valuations,” according to Esty Roditi, Investment Specialist with Natixis Investment Managers.
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