Anniversary Of W.I.T. (Whatever It Takes)

Three years ago this month, ECB President Draghi issued his now-famous pledge to do “whatever it takes” to save the euro.  Indeed, it has done its part. The ECB has a negative deposit rate, something that even with a protracted fight against deflation, the Bank of Japan never tried. The Federal Reserve is said to have considered it but obviously chose not to do it. 

The Outright Monetary Transactions (OMT) was recently endorsed by the European Court of Justice as a legitimate exercise of the ECB’s authority, over the objections (and testimony) by the Bundesbank (though supported by the German government).  The ECB has launched an asset purchase program, which includes asset backed securities, covered bonds, and sovereign bonds.

The euro area is enjoying a cyclical recovery.  The decline in oil prices, interest rates, and the euro provided the stimulus with a lag.  While the 50% bounce in the price of Brent from the January lows has arrested deflation, it, along with the firmer euro and backing up bond yields, warns that the cyclical recovery may have seen its best days in the first half.  Draghi has noted that eurozone countries have been slow to implement structural reforms, leaving the cyclical recovery vulnerable. 

Yet despite the somewhat better economic conditions and Draghi’s pledge, EMU having an existential crisis.  Encouraged by some European politicians, investors are not convinced that monetary union is irreversible. Some argue that Greece lied to enter EMU in the first place. That has little to do with current circumstances. Moreover, at the time, Germany and France needed liberal interpretations to meet the Maastricht requirements.  

Indeed, the door that was wide enough for the core was wide enough for the peripheral countries to join too. Greece, we would argue, did not bamboozle the seasoned bureaucrats in Brussels, Frankfurt or Paris in 2001 when it joined monetary union.