October 29, 2019

FBS, What is left in Europe after Mario Draghi?

ECB's ex-president Mario Draghi's policies on focus.

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This article is originally referred from FBS Special Report.

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Mario Draghi – His legacy and Saving the Euro Journey

After 8 years of being the president of the European Central Bank, Mario Draghi said goodbye at his last ECB press conference.

He was called Super-Mario for his significant role in leading the eurozone through difficult times of the debt crisis and the inflation issue.

Draghi took office in November 2011, shortly after the financial crisis in the eurozone begun. At the crisis peak, investors were worried about the debts, Spain, and Italy’s economic situations.

Draghi saved the day when many thought the eurozone was doomed.

Draghi came up with outright monetary transactions (OMTs). Although the program was never used, its mere existence calmed markets and investors, and ECB never had to spend a single Euro on fixing the distressed government’s situations. He had other big challenges like indifferent economic growth and inflation.

Although Mr. Draghi tried hard, he couldn’t prevent the euro from depreciation. The eurozone needs a new monetary policy. Let’s see how the euro will react to the new president.

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European Central Bank President leaving

He saved the euro, however, he’s leaving the ECB to face the unknown without his vision.

Many people see him as the Euro’s Savior and in their eyes, he’s the knight in shining armor.

Mario Draghi, known as Super-Mario, is wrapping up his 8 year team as the European Central Bank President.

The October meeting and the following press conference are Draghi’s last appearance in this position.

What Draghi has done?

Under his motto “whatever it takes”, Draghi served his term in the bank and did his best to save the euro.

Now, he’s leaving the ECB at crossroads while a recession is looming in the darkness.

As Christine Legard is getting ready to take over the chair he sat on in the last few years.

Let’s see how did Draghi save the euro?

What was his rescue plan, and what kind of legacy is he leaving for his successor?

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How were things when he arrived at the ECB?

The eurozone ifinancial crisis was developing when Mr Draghi arrived at his office as the president of the ECB in November 2011.

At the crisis’ peak, many thought that the eurozone would collapse.

Greece was so close to giving up the common currency, although the eurozone could have survived that.

Investors were worried about the debt crisis of other eurozone economies, especially two of the largest – Italy and Spain.

If one of them left the eurozone it would be a knockout strike, so the crisis became a fatal challenge for the euro as:

  • Markets suffered from severe pressure.
  • Borrowing costs rose to unsustainable levels in both countries.
  • Investors were afraid that they might leave the euro and repay their debt with their restored national currency.

And here, the Savoir “Mario Draghi” stepped in to save the situation.

Some consider this the most significant moment during his time at the ECB.

And the was the beginning of “doing whatever it takes to save the euro” era.

Rescue Plan of Draghi Mario

“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, in July 2012, London.

When words are stronger than actions.

That’s how the ECB controlled the debt crisis and saved the euro value, making Draghi’s famous statement as the starting point.

Draghi and his colleagues worked on an emergency program called outright monetary transactions (OMTs).

This program involved buying the boards of debtsof financially stressed governments in the eurozone if their borrowing costs reflected the fear of investors about a eurozone breakup (if it rose to record high level).

Also it was designed to purchase government bond if necessary to keep yields from flying to levels that countries such as Italy and Spain could no longer afford.

The program was never used although, it proved its success.

As its mere existence calmed the storm and those high borrowing costs came down to manageable levels.

Bond yields also declined to bearable levels in those troubled governments.

And it just like that markets were percuaded and the ECB didn’t even spend a single euro in buying any debts or bonds.

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Inflation, Interest Rates and Quantitative Easing

When Draghi dived in the economic depth of the eurozone, he found more stubborn challenges that needed bold steps to solve as indifferent economic growth and low inflation, which was below the ECB’s target.

Draghi tried to raise inflation toward the bank’s target, below but close to 2%.

Under Draghi’s leadership, the ECB managed to contain the problem.

There has been quantitative easing, buying financial assets, especially government bonds, with newly created money.

Although there are similarities between QE and OMTs, there is an important difference.

QE isn’t targeted on countries with borrowing cost problems.

For example, the ECB’s biggest holding of government bonds is Germany’, a country that doesn’t have that problem.

The ECB has also cut one of its interest rates to below zero, although not many central banks went through the world of negative interest rates.

Draghi’s legacy

Mario Draghi has been a key player in some of the highly technical innovations that central banks have created in the aftermath of the financial crisis in 2018.

So what kind of legacy does Draghi leave?

  • The eurozone economy has been growing since the second quarter of 2013 but without much robust. There also are some warning signs now.
  • Germany, the largest economy in the zone, might be in recession.
  • Inflation is short of the ECB’s target.
  • Monetary policy: interest rates and QE can’t fix this problem.

His successor, Christine Lagarde suggested that some government needs to spend more if they have more room to do it, in order to provide the eurozone with some stimulus.

She didn’t name any country specifically, but it is no secret that she was talking about Germany.

After his journey came to its end, its’s time to say goodbye to Mario Draghi and thank him for his efforts to save the euro and serving the ECB with passion.

And let’s watch what Lagarde will do with what Draghi left for her as recession is hovering on the horizon.

Original Source: FBS Special Report

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