Project Syndicate
November 9, 2012
Is Europe’s crisis over? Investors, policy analysts, and even officials are quietly beginning to suggest that this might be the case. The euro has strengthened by nearly 10% against the dollar since European Central Bank President Mario Draghi vowed on July 26 to do “whatever it takes” to hold the currency together.
Similarly, the Euro VIX, a popular measure of expectations of euro volatility, has fallen significantly. The cost of buying protection against fluctuations in the euro/dollar exchange rate declined last month to its lowest level in nearly five years. Borrowing costs for the Spanish and Italian governments have similarly fallen dramatically.
A consistent narrative underpins this change in market conditions. European leaders have put in place mechanisms to support Italy and Spain. As of October, the continent has an operational European Stability Mechanism to purchase new Italian and Spanish government bonds if investors go on strike.
In parallel, the ECB has announced an “outright monetary transactions” (OMT) program to purchase bonds already trading on the secondary market. At their most recent summit, European Union leaders reiterated their commitment to finalize the design of a single supervisory mechanism by January 1, 2013, and to activate it by the end of next year.
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