The drama of the euro is not an existential crisis

Almost everyone in the financial markets remembers 10 years ago yesterday when Mario Draghi, then president of the European Central Bank, said he would do “whatever it takes” to save Europe. euro. Some will also remember the first time the euro dipped below parity with the dollar in December 1999, less than a year after the currency launched on a foamy stimulus ridge claiming it would soon challenge the dollar to world supremacy.

On both occasions there was a great uproar, retrospectively much more justified for one episode than for the other. The ‘whatever it takes’ discourse was truly important in preventing the eurozone debt crisis from spiraling out of control. This led to the Outright Monetary Transactions bond-buying program, which kept sovereign debt spreads low despite never being used.

It’s much more surreal to remember the frenzied parity party of 1999: traders’ contempt for “toilet money” that never went down, weeks of suspense as the exchange rate neared quite arbitrary 1 to 1, wild rumors of this or that investment bank buying euros to keep them above parity. By September 2000, when it had fallen below $0.85, the systemic problems of a weak euro worried global policymakers enough that there was concerted intervention by major central banks.

Two weeks ago the euro again hit 1:1 with the dollar for the first time since that first period of subparity ended in 2002. Last week the ECB raised rates for the first times in more than a decade and announced a new bond-purchase program, the Transmission Protection Instrument.

The ECB needs all the tools at its disposal. It is going through an extremely difficult period, more so than the other major central banks. The energy shock of the war in Ukraine, which could be multiplied many times over this winter if Russia cut off gas supplies, is the classic stagflationary challenge that leaves monetary policymakers with no good options. At the same time, the recent rise in bond spreads within the Eurozone, notably due to political uncertainty in Italy, continues to reflect the incompleteness of the currency. Compared to its counterparts in other major economies like the United States and Japan, the ECB operates a currency without a unified bond market or a large, centralized fiscal authority.

But it is also true that with each iteration, the development of euro governance becomes a little more calibrated and precisely designed and a little less existential and jury-rigged.

This time, the financial markets responded calmly to the break in the dollar parity. The truth has sunk in that large fluctuations in the external exchange rate are not necessarily a judgment on the credibility of the currency or its makers. The Eurozone is currently in significantly worse economic shape than the US, and the ECB’s rate hikes have lagged those of the Federal Reserve: it’s understandable that the currency is depreciating.

Movements in bond spreads between Eurozone members are certainly a huge problem, certainly for a large country with a stock of sovereign debt the size of Italy’s. But if the markets question the design of the TPI and its criteria for use, these are technical questions that can be solved in practice, and not fundamental questions of functionality or legitimacy.

The TPI is an iteration rather than a radical break. There will no doubt be a challenge to its legality in the German Constitutional Court, and there are of course doubts among eurozone authorities as to the expected results. But those differences have subsided considerably since the huge objections of principle, notably from the Bundesbank and the German finance ministry, that the ECB encountered when trying to expand its range of tools a decade ago. And compared to the spasms of hysteria back then over Greece exiting the euro, this time around there’s far less hyperventilating commentary about the currency’s collapse.

Let’s be clear: there is still a long way to go to provide the euro with a stable governance structure, including improving eurozone-wide banking and capital markets and expanding the pool of safe euro-denominated assets. euros. Until it does, those expectations since the launch of the euro that it would soon challenge the dollar as a global currency will continue to prove wrong. The share of the dollar in international financing fell after 2000 in favor of the euro but recovered all this lost ground by 2020.

But while the potential challenges for European economies may be even greater than during the eurozone sovereign debt crisis, the ECB is in a better position to address them. His judgment is always questionable, but his authority is much less so. Ten years after Draghi’s speech, financial markets know that the central bank will do whatever it takes to keep the eurozone together without having to make it explicit.

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