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Seven years on from Mario Draghi's "whatever it takes" speech, how has the ECB done?

26 July 2019

Seven years ago today, President of the European Central Bank (ECB), Mario Draghi, said "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough".  At that time, the euro was in crisis: Greek ten-year bond yields were over 27%, Italian ten-year government bonds had a yield of 6.4%, while German ten-year bonds only yielded 1.2%.  The ECB carried out substantial bond buying taking rates into negative territory. Consequently, bond yields fell substantially; Greek ten-year government bonds are now at 1.95%, which is less than the equivalent US Treasury yield. It appeared as though the tensions within the Eurozone had eased and the euro preserved. 

Today, however, the problems in the Eurozone economies have resurfaced . Yesterday, Draghi said that the manufacturing sector is getting "worse and worse", and the ECB is preparing additional stimulus, suggesting it would lower rates into even more negative territory and continue with its asset purchase programme. To mitigate the effects of further negative interest rates, the ECB is studying ways of implementing a tiered deposit rate, which it hopes will help the transmission mechanism of lending through banks without eroding their profitability. The ECB target for inflation is close to 2%, albeit slightly below. Seven years ago, core inflation was below target at 1.6%, and now it is even lower at 1.1%, therefore, falling well short of their inflation target.  

The IFO survey of the manufacturing business climate this month fell below the lows of 2012. The slump in manufacturing may have been made worse by US trade policy but it demonstrates the difficulties that continue to face the Eurozone economies. At yesterday's press conference, Draghi said that the ECB still sees the risk of recession as "pretty low" but growth remains anaemic at best. At the end of October Draghi will hand over the ECB presidency to Christine Lagarde. He leaves having preserved the euro, but the Eurozone economy still faces an uphill struggle. 

 

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