It's been 10 years since Mario Draghi's whatever it takes

It's been 10 years since Mario Draghi's whatever it takes

It was the eve of the London Olympics, the thirtieth edition of the Games that ended with Italy ninth in the medal table. On July 26, 2012 in that city in fibrillation and in the center of the world, with the torchbearers running around under Big Ben, Mario Draghi pulled out his bazooka, nine months after becoming governor of the European Central Bank: "Within the limits of our mandate , the ECB is ready to do anything to save the euro. And believe me, it will be enough, ”he said in a 10-minute speech that changed the European Union forever and extended the life of its common currency. History will pass the perfect synthesis, whatever it takes finished straight into Treccani as a neologism to be protected.

A turn of phrase can really represent a turning point if it is pronounced by the right person when necessary. Europe in that summer was under pressure, with sovereign debt being targeted by speculators ready to blow the bank by hitting the weakest: "Many countries were in crisis and under bailout", recalls Veronica De Romanis, economist and Luiss teacher. “In 2012 - he explains - Greece was already on its second aid package; Ireland and Portugal had received support; Spain was about to get its package to support the banking system ”. In Italy at Palazzo Chigi there was Mario Monti, with the spread that bit public accounts and inflamed the newspapers: the difference between the yields of the Italian ten-year BTPs and the German Bunds was 536 points shortly before Draghi's words, with the Italian securities which guaranteed 6.35% (almost double what happens today: 3.35%).

5 questions to understand the interest rate hike decided by the ECB The European Central Bank has announced that it will raise interest rates in the coming months. From inflation to the spread, the keywords to understand the effects The three pillars of whatever it takes "Saving the euro was an unexpected task: the founders of the single currency had thought of a marriage without the possibility of divorce, an irrevocable membership because in an indestructible area ", underlines De Romanis. "Draghi's ability - highlights the economist - was knowing how to speak to different interlocutors. We all remember whatever it takes but that's only part of the reasoning. He began by recalling that he would act within the mandate of the ECB to reassure politicians in Germany frightened by the possibility that monetary policy was put at the service of national fiscal policies ”.

Appeased Berlin, Draghi used the three iconic words to brush aside doubts about the future of the euro, ensuring that he would do just about anything for the common currency. Finally, he commented putting the most speculative traders in their place: "By saying 'and believe me, it will be enough' he addressed the financial markets, who was attacking the euro project, inviting them to stop because the Central Bank would always be, and in any case, much stronger than them ", adds De Romanis.

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Mario Draghi's three sentences that the July 26, 2012 changed history from minute 7.04 to minute 7.22

After the speech at the Global Investment Conference in London ended, the financial markets cooled instantly. The chronicles tell of a BTP-Bund spread falling to 470 basis points, with European stock exchanges celebrating: on 26 July 2012 Milan gained 5.62%, Madrid 6.06%, Paris 4% and Frankfurt 2 %. And those simple phrases were enough, as the economist Francesco Daveri summarized in a comment on Corriere della Sera on newsstands the next morning: "When Mario Draghi declares that 'the ECB is ready to do anything to save the euro', the markets toast. In his words, Draghi does not print money or create liquidity, but reassures the markets and offers the poorest asset today: trust ”.

The OMT bazooka and the road to quantitative easing However, it was not necessary to wait long to see something more beyond words. On the board of the ECB on 6 August 2012, Draghi spoke for the first time about the OMT, a new tool which was then made available to countries in September. “It is the real bazooka that would have allowed the ECB to buy the government bonds of a country under attack in an unlimited way - explains De Romanis -. And if the ECB buys bonds in an unlimited way, it is clear that it wins; but his could never have been an unconditional intervention: the OMT provided for adherence to an adjustment program ".

And also for this reason the OMT was never used, with European governments frightened by the political effects of the Troika's intervention in Greece. But the wall was now broken: everyone had seen the unconventional measures in the governor's toolbox that in a few years put an end to speculation and spread anxiety with the launch of quantitative easing (Qe), first announced and then became operational in 2015. “Quantitative easing which provided for the purchase of government bonds by the ECB, for all economies without distinction”, that is, without the need to follow an obligatory path of reforms. At the beginning, the ECB bought 60 billion a month, then 80, gradually falling to 20 billion before a new flare-up in 2020 to plug the chasms opened by Covid-19. In seven years of government bond purchases, the ECB injected € 2,744 billion into the system. In Italy alone 448 billion arrived until June 2022.

From whatever it takes to 2015, more than two years passed, De Romanis points out, because "it took time to convince the Germans who have always defined quantitative easing a drug with no incentive to keep the accounts in order ”. Germany led by Angela Merkel in exchange for non-opposition to Qe obtained the fiscal compact, with stricter constraints for the compilation of budgets and clear steps to lower the debt-GDP ratio of the most exposed countries (Italy in the lead). The ECB, notes De Romanis, in those years did its part, "but it was up to national governments to implement the right policies", to ensure that the benefits generated by the greater liquidity in the system could end up cascading into the economic fabric. "As Draghi himself said, you can take your horse to the river, but you can't force it to drink: if the banks, from which the ECB bought government bonds, do not trust families and businesses because the government does not makes reforms to improve the economic environment, all liquidity is preserved ", the economist comments.

Why we talk about spreads again The government crisis has caused it to rise and interest rates have increased decided by the European Central Bank risks causing another surge 10 years after whatever it takes the new ECB shield Almost exactly ten years after Draghi's words, the ECB on 21 July 2022 launched the Transmission Protection Instrument (TPI), a new anti-spread instrument which provides for the possibility for the central bank to buy again the government bonds of countries in difficulty. "The ICTY - the ECB explained - represents a further tool available to the Governing Council that can be activated to counter unjustified, disordered market dynamics that seriously jeopardize the transmission of monetary policy throughout the euro area. The scope of the purchases of the ICC will depend on the severity of the risks for the transmission of monetary policy ".

As Cristine Lagarde, current governor of the ECB, explained, the activation of the ICT will have elements of "discretion" that will give the Frankfurt board a lot of freedom. But in principle there will be four constraints necessary to activate the mechanism: no infringement procedure for excessive deficit; no serious macroeconomic imbalances in the budget; debt sustainability; finally, the presence of sound and sustainable macroeconomic policies, with the commitment to respect the stakes of the National Recovery and Resilience Plan (Pnrr) and the specific recommendations of the European Commission for each country in the fiscal field.

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