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December 30, 2012 3:59 pm
Oh, the power of words. Credit for the restoration of a semblance of stability to the eurozone has been given to European Central Bank president Mario Draghi’s “whatever it takes to save the euro” comment in July. In fact, his second sound bite that day in London – “and believe me, it will be enough” – is more relevant. There had been several attempts at the “whatever it takes” line as the eurozone crisis unfolded during the past three years. But it took Mr Draghi’s second phrase, with its vague and necessary hint of menace – the prospect of unlimited ECB resources to drive down bond spreads – to do the trick.
Mr Draghi achieved two things. The euro stopped sliding against the dollar: indeed, the exchange rate has recovered sharply, to about $1.31 from $1.20 in the summer, when fear that Greece might tumble out of the eurozone reached a peak. And bond spreads fell for Italy and Spain, in particular – the two countries most at risk of contagion from a Greek exit. Italian 10-year bonds now yield about 4.5 per cent, compared with more than 7 per cent at the start of the year. Spain’s are below 5.5 per cent, having been higher than 7.5 per cent. This has happened without the need for the ECB to activate its “outright monetary transactions” – a policy of buying distressed-country bonds in the market in return for country-specific reforms.
Words alone will not keep the eurozone together indefinitely, however. Investors worry about the level of complacency that sets in whenever eurozone leaders make the slightest progress. It will not do simply to have the ECB on standby to wade into the debt markets when the next stage of the crisis occurs, as it undoubtedly will. The eurozone will remain in recession for much of 2013. Meanwhile, the ability of bailed-out countries to meet ever more demanding targets must be in doubt, especially in Greece. Mr Draghi has taken the eurozone a step towards resolving its crisis. Unfortunately, there are many steps left to take.
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