Draghi's Commitment

UVA-GEM-0113 Rev. Mar. 8, 2018

Draghi’s Commitment

…the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. —Mario Draghi, President of the European Central Bank (ECB)i

As Arturo Rodrigo was riding the early morning Metro North train from Manhattan to Greenwich, Connecticut, in February 2018, ECB President Mario Draghi and eurozone debt markets dominated his thoughts. Rodrigo was old enough to remember the dramatic convergence in eurozone long-term rates that occurred in the late 1990s just prior to the advent of the euro. The long rates of Italy and many other eurozone countries decreased sharply, converging to the much lower German rates (Figure 1). This unprecedented decrease in borrowing costs fueled borrowing binges in Athens, Madrid, Dublin, and many other eurozone cities.1

Figure 1. Convergence in long-term bond yields (through mid-2007).

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1 There are many English names for the area, including eurozone, euro zone, and euro area. This author tends to use eurozone.

This case was prepared by Francis E. Warnock, the James C. Wheat Jr. Professor of Business Administration at the University of Virginia’s Darden School of Business. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to [email protected]. Page 2 UVA-GEM-0113

Between 2003 and 2006, the spread between bond yields in Greece (and other periphery countries) and Germany averaged a razor-thin 25 basis points. When the global financial crisis (GFC) took a turn for the worse in September 2008, long rates in Germany (the core of the eurozone) fell sharply, but periphery countries such as Greece, Spain, Italy, and Ireland saw their long rates surge (Figure 2).

Figure 2. Divergence in long-term bond yields (through January 2018).

The crisis appeared to end in mid-2009 and, amidst hope that the worst was over, periphery long rates declined a bit. But starting in late 2009, rates in Greece and other countries spiked upward once again, and the “Great Convergence” in long rates that each periphery country had enjoyed when joining the eurozone had given way to the “Great Divergence.” In the second half of 2010, the spread between Greek and German long rates widened to 1,000 basis points. And the situation got progressively worse. By summer 2012, German yields reached a then-record low of 1.22%, whereas Greek yields were bouncing between 20% and 40%.

Another end to the crisis occurred in late summer 2012, prompted by ECB President Mario Draghi’s commitment to do “whatever it takes” to preserve the euro. Markets took note: Greek yields immediately fell sharply. By summer 2014, Greek long rates had trended down to 6%, and periphery countries such as Ireland and Spain were able to borrow at five years for less than the U.S. Treasury. Perhaps the worst was over. But some, including the IMF, were skeptical: “[T]he centrifugal forces across the euro area remain serious and are pulling down growth everywhere.”ii

Draghi’s “whatever it takes” talked down the high risk premiums that threatened to break apart the eurozone. AndDO in early 2018, the NOT eurozone was finally emerging COPY from a seven-year recession and strong deflationary pressures. Did Draghi actually conquer tepid growth and deflation as he did high risk premiums? He had taken a number of steps—imposing negative interest rates on banks’ excess reserves, incentivizing loans to small businesses, and a full-blown quantitative easing (QE) program that would involve EUR2.5 trillion in ECB purchases of eurozone sovereign bonds by the end of 2018. But would it be enough?

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Rodrigo, a strategist at a hedge fund, focused today on long-term interest rates and had two decisions to make. First, what was the path of core (i.e., German) eurozone long-term interest rates likely to be over the next year? Was the dramatic decline in German long rates over the past few years—German 10-year rates had been less than 1% since mid-2014—an aberration that would soon be reversed, or was it part of the “new normal” that would persist for some time? Second, how would periphery long rates evolve relative to core rates? That is, how would the spread between long rates in Greece, Ireland, Italy, Portugal, and Spain (the GIIPS countries) and those in Germany evolve over the next year? Which was to be expected: another dramatic divergence in eurozone long rates or a continuation of the impressive reconvergence that began in the second half of 2012? In the background of any bond investor’s mind were debt levels (Exhibit 1) big enough to tempt any government to default.

Rodrigo knew many factors influenced long-term interest rates; he would have to use his entire toolkit to address this issue.2 The evidence was in no way clear-cut. Some factors pointed toward lower German rates, some toward higher, some toward a widening of eurozone spreads (even a dissolution of the eurozone as we know it), and some toward reconvergence. The ECB and other central banks, always important for bond markets, were more important than ever at this point in history: It is estimated that central banks purchased more than all the bonds issued by G10 governments in 2016 and 2017 (how could yields not be low in that environment?), but with the Federal Reserve and Bank of England halting bond purchases and the ECB tapering (from EUR60 billion per month in 2017 to EUR30 billion monthly in 2018) central banks will only buy 40% of government debt issuance in 2018.iii With Draghi’s mother of all Band-Aids (QE) set for tapering, Rodrigo wondered, “Was Draghi’s commitment to preserve the euro enough or would the monetary union be torn apart by forces against which the central bank was powerless?”

Background: The Advent of the Euro and the ECB

The eurozone was best viewed as one of a series of steps toward unity in Europe. In the 1950s, when the first steps toward integration in Europe occurred, unity was a distant dream. The continent had been the scene of two world wars in just a 30-year period: World War I started out as Germany and Austria-Hungary against the United Kingdom, France, and the Russian Empire, and the European portion of World War II began as Germany and Italy against much of the rest of Europe and Russia. Considering the massive loss of life in Europe over those 30 years, integration and unity could also be seen as a path toward survival.

European integration, a political necessity, came with an impressive set of acronyms. This list introduces and describes a brief history of many.

European Union (EU): Long before the monetary union was established, European integration began in earnest in 1957 with the formation of a customs union—the EU—in which member countries agreed to remove tariffs on international trade among members and impose tariffs on trade with nonmember countries. The EU started with six member countries (Germany, Belgium, Luxembourg, Italy, France, and the Netherlands) and grew to 28 membersDO by 2013. Step NOTby step, the process of integration COPY deepened. European Commission (EC): The EC was an executive branch formed by EU members. Also formed were the European Court of Justice in Luxembourg and a legislative branch (the European Parliament). But the EU’s supranational powers were limited. It was bound by unanimity clauses on a variety of issues. Key decisions were made by the Council of Ministers (composed of politicians from all member countries), at times making

2 For a primer on models of interest rate determination as well as discussions on yield curves and the relationship between short and long rates, see Francis E. Warnock, “The Determinants of Interest Rates,” UVA-BP-0489 (Charlottesville, VA: Darden Business Publishing, 2006).

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agreements difficult to reach. The EC was particularly limited in its spending and funding abilities: its budget was about 1% of the GDP of its participating members, and it could not borrow or raise taxes at will.

Exchange Rate Mechanism (ERM): Integration that began with the EU continued with a first step toward a monetary union with the 1979 formation of the ERM, a key component of the European Monetary System. In the ERM, members limited fluctuation of their currencies vis-à-vis one another. Indeed, to qualify for admittance to the ERM, a candidate country had to have limited exchange rate fluctuations vis-à-vis the core (i.e., Germany).

During the ERM period, European countries still had their own currencies. Yes, there was the European Currency Unit (ECU)—a GDP- and trade-weighted average of members’ currencies—but it was more of an accounting item than an actual currency. Marks were still used in Germany, francs in France, and the national central banks still controlled monetary policies. This led to substantial strains on the system because countries’ economic cycles were not in sync; within the ERM, in a foreshadowing of tensions that would reemerge with a vengeance during the eurozone debt crisis, some countries would want to tighten monetary policy when others would want to loosen it. A classic example occurred in late 1992 when Germany, its economy overheating, tightened monetary policy at a time when many other ERM members’ economies were suffering and needed expansionary policy. Mundell’s Trinity came into play in full force, and the leg of the trinity that many countries gave up was that of the fixed exchange rate (vis-à-vis Germany, the core of the ERM), greatly weakening the ERM.3

European Monetary Union (EMU): The repeated stresses of the ERM helped shape the next steps in European monetary convergence: the EMU and eventually the common currency (the euro). The Maastricht Treaty, signed in 1992, contained a number of criteria—the so-called Maastricht criteria—that aimed to alleviate some stresses. To qualify for membership in the EMU, countries’ central banks had to have complete independence from their central governments, inflation and interest rates had to be near the average of the group’s best performers, fiscal deficits could not exceed 3% of GDP, and outstanding government debt could not exceed 60% of GDP. The inflation prerequisite meant that there would be convergence in inflation rates between the candidate country and the low-inflation countries, especially Germany. In fact, in the years before EMU entry, many countries openly announced that they would no longer make independent decisions on monetary policy and would instead follow the German Bundesbank in every decision. Later, one of the prequalifying criteria— the limit on fiscal deficits at 3% of GDP—was transformed through the “growth and stability” pact to become not just a prerequisite to membership but a permanent ongoing rule, violators of which were subject to censorship or fines.

The euro: With the EMU came the euro in 1999. Countries in the union could no longer depreciate their currencies because they had given up both their currencies and their right to conduct monetary policy. The new currency was the euro, and all monetary policy decisions were made at the ECB. This eliminated one set of problems that plagued the ERM, but the EMU was cursed with another ERM problem: the inability or unwillingness of some governments to control their fiscal deficits. The growth and stability rule of a maximum fiscal deficit of 3% was quickly flouted by the two largest countries, Germany and France. This prompted a change in the rules’DO wording; now memberNOT countries’ budget deficitsCOPY could not exceed 3% averaged over the business cycle. Neither Germany nor France was punished or fined for violating the deficit rule, and this paved the way for many other members to follow their lead.

3 On the 1992 episode in the context of currency crises, see Francis E. Warnock, “Currency Crises in the United Kingdom and Hong Kong,” UVA- GEM-0108 (Charlottesville, VA: Darden Business Publishing, 2011).

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The euro was launched at a rate of USD1.166754 per euro on January 1, 1999, when the currencies of 11 countries—Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain—ceased to exist.5 The euro immediately became a major international currency, second only to the dollar. Along some economic and financial dimensions, the eurozone countries were a close match for the United States. Their combined GDP in 1998 was USD6.6 trillion, compared with USD8.5 trillion for the United States. Their share of international trade outside the eurozone (19%) was slightly larger than that of the United States (17%). Taken together, bond markets in euro countries were only somewhat smaller than that of the United States, but their equity markets were much smaller than Wall Street. The eurozone had one blemish that was impossible to hide: it suffered from “eurosclerosis” or persistently high unemployment; at 10%, unemployment was far higher than in the United States.

The eurozone expanded in its first 15 years. Greece became the 12th member in 2001. Slovenia joined in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, and Lithuania—after being the only country to be denied membership when it applied in 2006—became the 19th member on January 1, 2015. Eight countries—Bulgaria, the Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and the United Kingdom—were members of the EU but retained their own currencies and did not use the euro. (The United Kingdom started the formal 2-year process to leave the EU in March 2017, meaning it is due to exit the EU in March 2019.)

The European Central Bank (ECB): When the euro was launched in 1999, the 11 original members maintained their national central banks but delegated monetary policy (but not financial-sector regulatory and supervisory duties) to the newly formed ECB in Frankfurt. In fact, many countries had been mimicking the German Bundesbank (BuBa) for a few years prior to the euro’s introduction. The formation of the ECB did two things. First, prior to its formation, national central banks were mimicking the BuBa, but in a sense, this was easily reversible; if countries wanted to deviate from BuBa policy, they could. By joining the euro and ceding all monetary policy decisions to the ECB, deviating from eurozone monetary policy now required leaving the union. Second, the central bank at the heart of all decisions was no longer the BuBa (which became, after the formation of the ECB, just one of 11 national central banks) but the ECB. In 1999, whether the ECB would do exactly what the BuBa wanted was open to debate.

The first ECB president—Wim Duisenberg, the former governor of the Netherlands central bank—was widely seen as a placeholder until Jean-Claude Trichet took over in 2003. Prior to becoming the ECB’s second president, Trichet was governor of the Banque de France, but in Frankfurt, he proved to have a very Germanic distaste for inflation. In late 2011, Mario Draghi, an Italian who was a PhD student at MIT at the same time as former Fed Chairman Ben Bernanke, became the ECB’s third president. Draghi would become known as the man who would do “whatever it takes” to get the union through its many crises.

Eurozone Crises

The eurozone weathered the darkest days of the GFC and could even point to the United States, at the center of the GFC,DO with some schadenfreude NOT. But then came a seriesCOPY of eurozone crises and, perhaps the most damning, the slow rot caused by years of stagnation.

4 USD = U.S. dollars. EUR = euros. 5 The euro did not exist as a physical currency until 2002 but was traded on financial markets starting in 1999.

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The Greek crisis

The Greek crisis emerged in late 2009. At its heart was a government that had misrepresented budget data in order to be admitted to the eurozone; in 2009, it finally owned up to these fabrications. The EC put it bluntly:

On 2 and 21 October 2009, the Greek authorities transmitted two different sets of complete Excessive Deficit Procedure (EDP) notification tables to Eurostat, covering the government deficit and debt data for 2005–2008, and a forecast for 2009. In the October 21 notification, the Greek government deficit for 2008 was revised from 5.0% of GDP (the ratio reported by Greece, and published and validated by Eurostat in April 2009) to 7.7% of GDP. At the same time, the Greek authorities also revised the planned deficit ratio for 2009 from 3.7% of GDP (the figure reported in spring) to 12.5% of GDP, reflecting a number of factors (the impact of the economic crisis, budgetary slippages in an electoral year, and accounting decisions)…Revisions of this magnitude in the estimated past government deficit ratios have been extremely rare in other EU Member States but have taken place for Greece on several occasions. These most recent revisions are an illustration of the lack of quality of the Greek fiscal statistics (and of macroeconomic statistics in general).iv

EU members were shocked and angered, and the bond markets quickly punished the Greek government. There were whispers that Greece would be expelled from the eurozone: Didn’t the growth and stability pact dictate that budget deficits be less than 3% of GDP? A quick response to that could be, “Sure, but weren’t the Germans and French the first to break that rule, and were they ever penalized even a single euro?” The fate of the eurozone hung in the balance. And the bond markets punished not only Greece but much of the eurozone periphery (Figure 3).

Figure 3. Long-term bond yields in the GIP countries (through January 2018).

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Clearly not all periphery countries had fudged debt and deficit figures as Greece had done. But faith in the entire monetary union was wavering. In the first half of 2010, the euro fell in value from USD1.50 per euro to USD1.20 (Exhibit 2), and the eurozone, which attracted enormous foreign investment in its bonds just a short

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while earlier, was rapidly seeing those bond inflows disappear (Exhibit 3). Basic economic indicators (Exhibit 4) were fine for some countries (notably, Germany) but alarming for others.

Faith in the entire monetary union was wavering, but was the eurozone teetering? The answer, according to then-President of France Nicolas Sarkozy, was an emphatic “no”:

It is an absolute general mobilization: we have decided to give the eurozone a veritable economic government. Today we have an attack on the whole of the eurozone. This is a systemic crisis: the response must be systemic. When the markets open on Monday morning, we will be ready to defend the euro.v

The so-called “troika”—the EU, ECB, and IMF—indeed came to the rescue of the euro and made sure there would not be any defaults. In May 2010, an EUR110 billion bailout facility for Greece was announced. There were a few separate facilities. Some would be controlled by the EC, the executive branch of the EU, and would allow the EC to borrow against its budget, which was guaranteed by all EU members. Another, larger portion was guaranteed by individual eurozone countries. A third component came from the IMF. Around the same time, the ECB also announced it would buy troubled government bonds and accept downgraded Greek bonds as collateral.6

Bringing in the IMF was particularly painful. The Germans (and French) had the most to gain from a Greek bailout (or, at least, they would lose the most if Greece failed) because their banks had the most exposure to Greek debt. Based on Bank for International Settlements (BIS) and IMF data, German exposure to Greek banks amounted to 1.1% of German GDP. It would be better for Germany to bail out Greece, which was relatively small, than to have to bail out its own banking system. The German economy could handle a 1.1% write-off. But if the crisis spread, Germany would be in trouble because its exposure to Irish and Spanish banks was much greater—roughly 10% of German GDP.

But the Germans argued that, technically, the treaty establishing the EMU did not allow one country to make a fiscal transfer to another; a no-bailout clause was in effect in the union, so Greece had to turn to the IMF. Much later, this stance was necessarily altered, but in 2010, it was left to the IMF to descend on Greece, bringing with it its prescription of fiscal tightening. The fiscal measures, which were designed to get the overall government deficit below 3% of GDP by 2014 and to start lowering the debt-to-GDP ratio from 2013 onward, included a significant reduction of public-sector wages and pensions (which, together, comprised roughly 75% of the all noninterest public spending); pressure to increase tax revenue by improving tax collection and increasing the value-added tax; and an emphasis on additional reforms that would drive down costs, increase productivity, and make Greece more competitive.7

The eurozone was in tatters. In quick succession, hardworking Germans who had recently seen a great reduction in their benefits8 had to bail out early-retiring, sun-worshipping Greeks; the IMF swept in on a member state like it was some emerging market; and the vaunted independence of the ECB disappeared when it stepped in to shore up wayward countries’ dysfunctional bond markets. Greeks, unhappy with the prospect of austerity measures,DO took to the streets,NOT and, in some cases, theseCOPY protests resulted in violence. But the various bailouts in the spring of 2010 seemed to work…for a while.

6 A second Greek bailout of EUR130 billion was implemented in February 2012. 7 For more information on the IMF’s plan for Greece, see “Statement by the European Commission, the ECB and the IMF on Greece,” IMF, March 19, 2014, http://www.imf.org/external/np/exr/faq/greecefaqs.htm (accessed Jan. 2, 2015). 8 The German reduction in benefits was part of the successful but deeply unpopular Hartz labor market reforms implemented in 2003 to 2005. See, for example, http://www.voxeu.org/article/german-labour-reforms-unpopular-success (accessed May 5, 2015.)

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The Irish crisis

Next in line was Ireland. Ireland had not fudged its debt and deficit statistics as Greece had done. Its banks were not heavily involved in mortgage-backed securities markets as many German banks were. No—its crisis was of the plain vanilla variety. Ireland, which, a decade earlier, had prospects so bright that it was dubbed the Celtic Tiger, engaged in a debt-fueled construction boom. Irish banks obtained cheap funding in international (eurozone) markets and lent into the boom. The boom quickly morphed into a bust when real estate prices began to slide, Irish banks’ access to short-term funding markets closed, the Irish government guaranteed the debts of two large banks, and suddenly, the former Celtic Tiger—which entered the crisis with a budget more or less in balance and very little public debt—had a dizzying amount of debt (almost all from its saving of the bad banks) and deficits that seemed impossible to manage.9 See Exhibit 1 for fiscal indicators.

Late in November 2010, the EU announced an EUR85 billion package to bail out Ireland, as the IMF descended on yet another eurozone country. Markets were not impressed. Not only did Irish bond prices plummet at the news, so did those of Portugal, Spain, Italy, and Belgium. European stock markets plummeted, and the euro sank vis-à-vis the U.S. dollar. Investors worried that the Irish government would not be able to inflict enough pain on its residents to turn around its fiscal nightmare. Or they worried that the government’s austerity measures would be so successful that Ireland would have tepid economic growth, implying that the country would not grow fast enough to service its now enormous (and costly) debt burden. Investors also (correctly) ascertained that the nature of the Greek and Irish bailouts—in which senior creditors were left whole and the people of those countries would have to shoulder (for years!) the entire burden of their financial sectors’ bad behavior—was unlikely to be replicated in other countries if more bailouts were necessary. The funds Europe was committing to the problem were too little, and other European debt markets too large. (In 2010, Italy had the third-largest sovereign bond market in the world!) Were the crisis to spread further—which other eurozone government would have to save its banks and move their liabilities onto the public books?— bondholders would have to take a hit. At some point, there would be a default, a restructuring. In that world, rational investors would naturally demand higher bond rates. If credit risk is suddenly a real concern, bond rates must increase.

The Cypriot crisis

Cyprus had a crisis of an entirely different sort. Putting an emphatic end to a relatively quiet period in late 2012 through the first part of 2013, Cyprus had an old-fashioned banking crisis, complete with bank runs and capital controls. This gave rise to a new question: When was a euro not a euro? When it was in Cyprus. Were capital controls in Cyprus the beginning of the end of monetary union? The answer, at least through spring 2015, seemed to be “no,” as the Cyprian capital controls quickly became yesterday’s news.

Slower-moving crises?

Additional crises were caused, at least in part, by the crushing weight of austerity. By 2012, austerity had become the norm in all eurozone countries (Exhibit 1), and as it turned out, contractionary fiscal policy proved to be contractionary. This caused great pain, and unemployment rates spiraled ever higher. Many governments were toppled. InDO fact, for a while everyNOT eurozone government COPY that came up for reelection was voted out of power. That in itself—high unemployment leading to early elections and the removal of the ruling party—was

9 For a wonderful assessment of the Irish case from an economics perspective, see Central Bank of Ireland Governor Patrick Honohan’s speech to the Ireland Japan Chamber of Commerce, “Fast-Growth Economies: Sustainable and Unsustainable Examples from Europe and Asia,” August 19, 2010, http://www.centralbank.ie/press-area/speeches/Documents/19%20August%202010%20-%20Speech%20- %20Address%20by%20Governor%20Patrick%20Honohan%20to%20Ireland%20Japan%20Chamber%20of%20Commerce,%20Tokyo.pdf (accessed Jan. 2, 2015).

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not necessarily a crisis. It did, of course, remind everyone that political and social tensions could lead to a path for policies that differed substantially from policies formed from purely economic considerations. And the social tensions (and pain) were real: youth unemployment rates were roughly 50% in Spain, Italy, Portugal, and Greece. One had to wonder how long populations would suffer before the real revolution began. Indeed, anti- euro parties were gaining strength in many countries, and in one (Greece), had been voted into power.

ECB Monetary Policy under Trichet and Draghi

Trichet steered the ECB in its mandate to maintain price stability, aiming at inflation rates of below, but close to, 2% over the medium term. At times, this singular focus on inflation had the ECB tightening when central banks with dual mandates might not. For example, in the early fall 2010, the Fed was signaling that it would hold nothing back in its efforts to shore up the U.S. economy with a second round of quantitative easing (QE2), but the ECB was taking a more hawkish stance. And the markets noticed; two-year U.S. interest rates continued to trend downward, but two-year rates on core eurozone government bonds (those AAA-rated) began to increase (Exhibit 5). Yes, the ECB had set up its Securities Markets Programme (SMP) in May 2010 when the ECB Governing Council announced it would conduct interventions in eurozone public and private debt securities markets to ensure depth and liquidity in those market segments that were dysfunctional. Although purchases were substantial in May and June 2010 (see bottom chart in Exhibit 6 for a measure of the size of the ECB’s balance sheet), they were very small in subsequent months. The ECB was signaling that, although it did step into sovereign bond markets in the spring, going forward it would focus on reestablishing its independence. A tightening of monetary policy was likely—German inflation was getting uncomfortably high—and the ECB was seemingly saying, “Let us not again have to intervene in dysfunctional sovereign bond markets.”

Some wondered if, in the fall of 2010, this hawkish stance by the ECB might come back to bite it. Sure, economic growth had picked up in many eurozone countries, but forward-looking survey indicators suggested a coming rough patch. And the debt crisis was not yet over. Although risk assets around the world rallied in September 2010, at the same time, Irish and Portuguese spreads widened to record levels. Was this a time for the ECB to be complacent? Ireland, which had notable problems to be sure, was held up as a role model to other eurozone periphery countries, given that, during its debt crisis, it promptly and aggressively slashed public- sector wages (by 30%!) and reined in government spending, all in an effort to prevent a Greek-like surge in borrowing costs. The problems in Ireland (and Greece and Portugal) had not yet spilled over into other eurozone countries, but one had to wonder: Now that Ireland had been rewarded for its fiscal austerity with a dramatic surge in borrowing costs, what would other periphery countries take away from the Irish experience? And if the markets continued to move against Ireland, would an IMF bailout of Ireland be far behind? Would the ECB be forced to step up its backstop facilities and expand the SMP? Sure enough, things made a turn for the worse. Rates surged in the periphery. Ireland sank. The IMF came in yet again. The ECB’s SMP activities were increased yet again.

Another example of hawkish ECB policy occurred early in 2011, when the ECB was worried about its credibility and decidedDO to act agains NOTt nascent inflation in the eurozoneCOPY by tightening monetary policy, not once but twice (Exhibit 6). The markets reacted by dumping periphery bonds, which sent rates skyrocketing not only in Greece but also in Italy, Portugal, and Spain. Here we can essentially repeat sentences from above. As in 2010, some wondered if, in the summer of 2011, this hawkish stance by the ECB might come back to bite it. Would the ECB be forced to step up its backstop facilities and expand the SMP?

The ECB’s world view changed—at least at the very top—in late 2011, when Mario Draghi took over the ECB from Jean-Claude Trichet. Draghi not only resumed activity in dysfunctional bond markets and reversed

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the ECB’s summer tightening but also began a program—the long-term refinancing operations (LTRO)—in which the ECB would lend to eurozone banks at a near-zero interest rate for three years, accepting sovereign bonds (but not Greek bonds, because Greece’s had been downgraded to junk status) as collateral. In the December 2011 LTRO1, 523 banks took the ECB’s offer and borrowed EUR489 billion. LTRO2 was implemented a few months later in February 2012 and enjoyed broader participation (roughly 800 eurozone banks borrowed a total of EUR539 billion). The LTROs had two immediate effects. First, they supported periphery bond markets (except Greece’s), because those bonds could be collateral for cheap ECB loans. Second, they enabled eurozone banks to engage in the type of carry trade U.S. banks had been involved in since the GFC began—borrow at near-zero rates from the central bank, park that money in higher-yielding assets, and sit back and watch the profits roll in. Of course, as with the Fed, the ECB hoped that banks instead would use the near-zero-cost loans to increase lending to businesses and consumers, which would spur much-needed growth in the eurozone economy.

One wondered whether the LTROs might put in motion a third side effect. By enabling a “domestication” of eurozone debt—that is, the bonds many banks purchased with the help of LTRO programs were their own country’s sovereign bonds—the cross-border holdings of bonds that pushed the German and French governments toward a Greek bailout were now greatly reduced. Would helping shield core countries’ commercial banks from peripheries’ troubles by easing core banks’ potential burden in the event of eurozone disintegration actually smooth the way to that very event?

In July 2012, many believed the eurozone would disintegrate. And then ECB President Draghi delivered his “whatever it takes” speech: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”vi By signaling that the ECB would now act as a lender of last resort, by in effect pledging more euros than imaginable, Draghi provided the mother of all Band-Aids for the eurozone debt crisis. Periphery bond markets rallied, and periphery yields fell sharply (Figures 2 and 3). The euro appreciated (Exhibit 2).

Was the crisis over? Probably not. Banks did take the central bank’s low-cost LTRO loans to the tune of about EUR1 trillion, enabling a sharp increase in the ECB’s balance sheet (bottom panel of Exhibit 6). But the banks, quickly realizing that they did not want to make loans, repaid the ECB’s loans early. At the end of 2014, the ECB’s balance sheet was no larger than it was when the GFC started. The unwillingness of eurozone banks to lend—or was it that there was just no demand for loans?—showed up in the eurozone’s money-supply numbers (Exhibit 7, top panel), which were tepid at best, and in a multiyear contraction in credit to the private sector (Exhibit 7, bottom panel). All this prompted Draghi to announce in January 2015 what was previously unthinkable (and illegal) to many: full-fledged QE of EUR60 billion per month that was open-ended but expected to last into 2017 and total over EUR1 trillion. (As of January 2018, the ECB’s QE program was still running, with a recent “tapering” of monthly purchases from EUR60 billion to EUR 30 billion and expectations that cumulative purchases would reach EUR2.5 trillion by year-end 2018.)10

ECB policies did not sit well with prominent German monetary policymakers. Trichet’s presumed successor was the hawkish head of the German Bundesbank, Axel Weber. But Weber, in protest of ECB policies, abruptlyDO resigned in February NOT 2011, eliminating himself COPY from contention as the next ECB head. Then

10 The ECB’s sovereign bond purchases are weighted by the “capital key,” which is countries’ contributions to the ECB (roughly proportionate with the size of each economy). As of January 31, 2018, the ECB held EUR1952 billion in member countries’ sovereign bonds, with the largest holdings being in German bonds (EUR464 billion, or 23.8% of the total ECB government bond portfolio, with a weighted average maturity of 6.5 years), followed by French (EUR380 billion, average maturity of 7.7 years) and Italian bonds (EUR330 billion, average maturity of 8.1 years). Greek bonds were excluded from the program. In addition to sovereign bonds, ECB QE programs also purchased covered bonds (EUR244 billion as of Janauary 2018), corporate bonds (EUR137 billion) and asset-backed securities (EUR25 billion). For full details, see http://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html (accessed Feb. 4, 2018).

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in September 2011, ECB executive board member Jürgen Stark abruptly resigned, also in protest of ECB policies. And the Germans’ concerns were not unfounded; upon becoming ECB president on November 1, 2011, Mario Draghi implemented not only LTRO1 but then also LTRO2. Just hours after implementing LTRO2, a letter to Draghi from Weber’s Bundesbank successor, Jens Weidmann, was leaked to the German press. In the letter, Bundesbank President Weidmann told Draghi that the ECB needed rethink its December decision to accept a wider variety of collateral from borrowing banks. According to the Financial Times, the leak was seen in some circles as an attempt to undermine the ECB president and his flagship LTRO policy.vii Draghi did not take the Germans’ attack lightly, warning the Bundesbank against public expressions of concern over his actions to combat the eurozone debt crisis. How the rift between the eurozone’s most powerful national central bank (the Bundesbank) and the ECB would evolve might determine the future of the single currency.

(Parenthetically, note that Draghi broke from Trichet on another point: forward guidance of monetary policy. Trichet repeatedly refused to provide guidance on where policy rates might head in the future: “[W]e never pre-commit.”viii In July 2013, Draghi explicitly provided forward guidance, stating that “[t]he Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”ix With this sentence, Draghi moved the ECB into the Fed’s world of forward guidance and open-mouth operations. Some, not surprisingly, questioned whether such forward guidance violated some European treaty.)

Eurozone Fiscal Policies and Structural Issues

In the eurozone’s first decade, governments took advantage of the low rates to run debt-financed budget deficits. For example, in 2007, cyclically adjusted primary balances (CAPBs) were negative—indicating expansionary fiscal policies—in countries such as France, Greece, Ireland, and Portugal (Exhibit 1). That is, even if those economies were performing well and leaving aside interest payments on existing debt, those governments’ budgets were geared to create deficits. Ireland, for example, had a balanced budget in 2007 but its CAPB was very negative, indicating very expansionary fiscal policy. That the budget was balanced was only due to a booming economy. When things hit the fan, growth slowed. The Irish government assumed the liabilities of two of the country’s banks, and the budget deficit and the government’s debt levels skyrocketed. The increases in budget deficits and debt levels in many countries, while not as dramatic as Ireland’s, were striking nonetheless. Portugal’s budget deficit was a whopping 11% of GDP in 2010; slow growth and the assumption of some banks’ bad liabilities increased its debt levels from 68% of GDP in 2007 to 126% by 2017.

Just as striking as the increase in budget deficits and government debt levels as the crisis unfolded was the astonishing amount of fiscal tightening that occurred since 2012. Greece’s CAPB increased 9.1 percentage points of GDP from 2010 to 2016, indicating an enormous amount of fiscal tightening. Indeed, by 2017, most eurozone countries were running structural surpluses, yet budget balances were negative (other than for Germany and the Netherlands), and in most countries government debt levels were still increasing.

Given the astonishing amount of fiscal austerity and the fact that banks were either unwilling or unable to lend, the eurozone’s poor growth performance through 2015 (bottom panel of Exhibit 8) was hardly surprising. Deflation had settDOled (top panel of ExhibitNOT 8), which was troubling, COPY and the area’s unemployment rate, although having improved slightly, remained worryingly high. With this background, in many eurozone countries firms were choosing not to expand their capital stocks (see “fixed investment growth” in Exhibit 4), causing many to wonder where exactly economic growth was going to come from.

One potential source of growth would be to sell to the rest of the world. Germany appeared to be good at doing that; its current account surplus was approaching an exceedingly high 8% of GDP (Exhibit 9). The periphery countries, on the other hand, ran current account deficits for many years. Although their current

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accounts edged into surplus starting in 2013, that was likely due to a collapse in economic activity—periphery countries reduced spending on all goods, including imports—rather than increased sales abroad. By 2017, a strong euro was no longer holding back exports, as the euro fell sharply starting in late 2014 (Exhibit 2). Costs in most periphery countries had increased in the boom years—see the real exchange rates based on unit labor costs in Exhibit 10—but were coming down in some (e.g., Spain).11 Cost disadvantages were somewhat persistent because many countries scored abysmally low in global competitiveness rankings (Exhibit 10).

Periphery countries might balk at making structural reforms, but some would recall that as late as 2004 Germany was regularly called the sick man of Europe. The Economist magazine noted at the end of 2004 that the country had “slow growth, high unemployment, record budget deficits, mass protest rallies…[u]nemployment is hovering around 4.5 [million], the pace of reform is still too slow and, particularly in the country's eastern part, reform's losers are taking to the streets.”x In early 2017, such a description would apply to many periphery countries. How did Germany shed its sick man label? It depends on who you ask. On the streets of Düsseldorf one might talk about the measures Germany took to improve flexibility in its labor market, reduce pensions, and increase the retirement age—measures that led to a surge in productivity that reduced unit labor costs and increased its international competitiveness (Exhibit 10). Elsewhere, you might hear that Germany engaged in vendor financing with the periphery, enabling it to run large current account surpluses that were mirrored by large current account deficits in Greece, Italy, Ireland, Portugal, and Spain (GIIPS) (see Exhibit 9 for aggregate current account deficits).

Is the Eurozone Viable?

The eurozone was feeling pretty good as late as 2008, when the ECB actually tightened twice (because it seemed the monetary union’s economies were doing well) and even during the GFC, because the eurozone could point to the United States as the source of all of the world’s problems. But by 2011, talk of the demise of the eurozone was rampant, and by early 2012, it was commonly believed that one or more eurozone members would exit the monetary union. Discussions focused not just on whether a periphery country might leave the union, but also if Germany and a few other countries might secede and form a “strong euro” zone.

Why might Greece and other periphery countries leave the eurozone? Although there would be substantial costs associated with secession, there would be at least two benefits. One, leaving the union would allow a country to quickly depreciate its currency and regain some international competitiveness. While in the eurozone, Greece (and others) could not depreciate vis-à-vis other eurozone countries, their major trading partners. The fastest way to regain that competitiveness was to depreciate their currency, which was impossible while retaining membership in the eurozone but possible if they seceded from the monetary union. As of 2017, the eurozone’s periphery countries had been going about current account adjustment the hard way, through gut-wrenching decreases in economic activity. To get an advantageous change in relative prices vis-à-vis other eurozone countries within the confines of a fixed-exchange-rate system, the periphery would need severe deflation that could come about one of two ways, both of which were difficult: through destabilizing, massive unemployment that lowered laborDO costs, or through NOT structural reforms in which COPY some would lose. Two, the burdens that were being (and had yet to be) placed on citizens’ backs were enormous. Gross debt levels in the GIIPS countries (Exhibit 1) were about 120% of GDP in Italy and Portugal and 183% in Greece. With this level of debt—a far cry from the 60% level imposed (imposed?) by the growth and stability pact— substantial budget surpluses would be required just to stabilize the debt-to-GDP ratios. Some of the heavy lifting on this had already been done, as many eurozone countries had already gone through a substantial

11 Note that in Exhibit 10, an increase is a real appreciation, and the indexes are set to equal 100 in 2010.

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tightening of fiscal policy (Exhibit 1). But wasn’t there an easier way? Some of the GIIPS government debt was held by foreigners. High debt servicing costs incurred by the GIIPS would lead to even more severe austerity measures, and who would benefit? Foreign bondholders? Why not just secede from the eurozone, default on existing debts and wipe the slate clean? Years of continued fiscal austerity would no longer be needed. Indeed, this was, in a nutshell, the platform that propelled the radical Syriza party to power in January 2015. Similar parties were gaining strength elsewhere in the periphery.

The eurozone faced the fundamental problem that it was not, in the parlance of economics literature, an “optimal currency area.” Countries that formed a currency union faced substantial restrictions—no currency to devalue, no control of monetary policy—that were only workable if there was also substantial flexibility in other aspects (labor mobility being one, flexible prices another). A currency union worked best if there were natural shock absorbers that spread risk amongst all parties (rather than concentrating the risk in one area). One of those shock absorbers or risk-sharing mechanisms was a fiscal union in which government tax and spending automatically takes from areas doing well and distributes to hard-hit areas. But the eurozone was not a fiscal union. Another risk-sharing mechanism was a banking union. The eurozone, when formed, did not have that either. During the crisis, problems with banks had to be dealt with locally. The Irish bailed out their failed banks; the Spanish had to spend oodles of euros to recapitalize theirs. Banking problems might have been stoked by others (in Germany?), but the cleanup had to be paid for by locals.

Starting in 2015, there had been significant strides toward instituting a banking union for the eurozone and other EU members. For the first time, there was common bank supervision via the Single Supervisory Mechanism (SSM): the most important 126 institutions were now directly supervised by the ECB, and the national authorities that supervised all other institutions were supposed to work together and with the ECB within an integrated system. Also put in place in 2015 was the Single Resolution Mechanism (SRM), which was to provide system-wide rulings on which banks should be shut down; it also had some funds to recapitalize banks put into “resolution.” The SSM and SRM implemented the Single Rulebook, a collections of laws governing the financial sector across Europe, and the rules also included a system of harmonized national deposit insurance schemes. One weakness was that the SRM and system of deposit insurance did not have a large common fiscal backstop, in part because a fiscal union was not yet under consideration. So one of the eurozone’s fundamental design flaws was being addressed with important steps toward a banking union, although a full-fledged banking union akin to that in the United States—one featuring large common (federal) backstops and a genuine single financial market with free financial flows across borders—was still not in place in early 2018. The eurozone was not a fiscal union, and it was also not yet a complete banking union; bad shocks in one area were decidedly not tempered by spreading the costs across many.

In some sense, the question of the economic viability of the eurozone took a backseat to the role the monetary union played as an important and necessary step toward European integration—integration that would prevent the catastrophes the continent brought on itself in World Wars I and II. Words the tough German finance minister, Wolfgang Schäuble, had for the Bundestag ahead of a February 2015 vote on another Greek bailout summed this up well: “In the 70 years since this catastrophe, the German catastrophe, we Germans should do everything we can to ensure that we hold Europe together.”xi Might Greece’s Syriza-led government promptDO Schäuble to concludeNOT that Germany had alreadyCOPY done enough?

The Decision

In early 2018, the eurozone was at a crossroads. Draghi’s “whatever it takes” commitment, made good through negative interest rates and over EUR2 trillion in bond purchases—had provided a respite from its existential crisis. Periphery countries, such as Ireland and Spain, were able to borrow over five years at rates

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lower than the U.S. Treasury had to pay (Exhibit 11). And the euro’s sharp depreciation (Exhibit 2) was welcomed throughout much of the union; perhaps it would bring about the end of the periphery’s disinflationary trends and long-lasting recession (Exhibit 8). Of course, many problems remained, and Greece still seemed to have one foot out of the union (if it left, would others follow?). In early 2018, the jury was out: it was too early to tell whether Draghi’s latest moves toward negative interest rates, incentivizing lending to small businesses, and full-blown QE would gain sustained traction.

Arturo Rodrigo’s task was clear. To decide on the likeliest paths of long-term interest rates in both the core (Germany) and periphery (e.g., GIIPS), he would have to take a stance not only on the likely path of traditional ECB monetary policy but also on the likelihood of further tapering of the ECB’s extraordinary measures. He would have to understand why rates were at their current levels and what was already priced into the market. He also had to sift through other more traditional data such as inflation, productivity, and fiscal policies. He then had to form a view on the many possible scenarios going forward in order to make two informed calls— periphery long-term rates up, down, or sideways, and core long-term rates up, down, or sideways—and identify possible risks that could blow his prognostications out of the water.

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Exhibit 1 Draghi’s Commitment Fiscal Data for Selected Years and Countries (as a percentage of GDP)

Cyclically Adjusted Budget Balance Interest Payments Primary Balance Government Debt (Net) Government Debt (Gross) 2007 2010 2017 2007 2010 2017 2007 2010 2017 2007 2010 2017 2007 2010 2017 Belgium 0.1 -4.0 -1.8 3.6 3.3 2.2 2.8 -0.6 0.4 78 88 92 87 100 104 France -2.5 -6.8 -3.0 2.4 2.3 1.6 -1.0 -3.4 -0.5 58 74 89 64 82 97 Germany 0.2 -4.2 0.7 2.4 2.1 1.0 1.5 -1.4 1.2 52 60 46 64 81 65 Greece -6.7 -11.2 -1.7 4.5 5.9 3.4 -5.5 -6.1 3.4 103 146 180 103 146 180 Ireland 0.3 -32.0 -0.5 0.6 2.3 2.0 -2.3 -6.8 1.1 14 66 61 24 86 69 Italy -1.5 -4.2 -2.2 4.5 4.1 3.7 1.7 0.5 2.2 92 105 121 100 115 133 Netherlands 0.2 -5.0 0.6 1.4 1.2 0.9 0.3 -3.4 1.3 34 46 47 42 59 57 Portugal -3.0 -11.2 -1.5 2.6 2.7 3.9 -1.1 -8.3 2.7 61 88 111 68 96 126 Spain 2.0 -9.4 -3.2 1.1 1.6 2.5 -0.2 -6.9 -0.1 23 46 87 36 60 99

Japan -2.8 -9.1 -4.1 0.1 0.5 0.1 -3.0 -6.9 -3.8 70 106 121 183 216 240 UK -2.7 -9.4 -2.9 1.6 2.4 1.8 -3.0 -4.4 -1.0 37 69 81 42 76 90 US -2.9 -10.9 -4.3 2.1 2.0 2.1 -2.0 -7.6 -2.3 45 70 83 65 96 108

Notes: 2017 numbers are IMF forecasts as of January 2018. Interest payments are a component of the budget balance; for example, in 2010, Italy’s budget deficit of 4.2% (of GDP) was almost entirely due to interest payments on existing debt that amounted to 4.1% of GDP. Net debt is government debt net of what is held by various arms of the country’s government (net, for example, of Federal Reserve holdings of U.S. Treasury bonds or of Japanese quasigovernmental agencies’ holdings of Japanese government bonds).

Data source: The IMF’s Fiscal Monitor, www.imf.org/external/ns/cs.aspx?id=262 (accessed Feb. 1, 2018).

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Exhibit 2 Draghi’s Commitment Dollar/Euro Exchange Rate and Euro’s Real Exchange Rate

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Notes: Last data point: January 2018.

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Exhibit 3 Draghi’s Commitment Eurozone Bond Inflows

Note: Last data point: 2017Q3.

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Exhibit 4 Draghi’s Commitment Selected Data for Selected Years and Countries

Real GDP Growth Unemployment Rate Fixed Investment Growth CPI Inflation 2007 2010 2016 2007 2010 2016 2007 2010 2016 2007 2010 2017 Belgium 3.0 2.5 1.2 7.5 8.3 7.9 9.7 1.1 4.2 1.8 2.2 2.1 France 2.3 1.9 1.1 8.0 9.3 10.1 8.5 3.2 3.4 1.5 1.5 1.0 Germany 3.3 3.9 1.8 8.5 7.0 4.1 6.6 6.4 4.3 2.3 1.1 1.7 Greece 3.2 -5.6 0.1 8.4 12.8 23.6 17.2 -19.6 1.0 2.9 4.7 1.1 Ireland 3.7 2.0 5.1 5.0 14.6 8.4 -1.3 -18.0 64.6 4.9 -0.9 0.3 Italy 1.3 1.6 1.0 6.1 8.3 11.7 4.4 1.8 2.7 1.8 1.5 1.2 Netherlands 3.6 1.3 2.1 4.2 5.0 6.0 8.6 -5.2 5.7 1.6 1.3 1.4 Portugal 2.2 2.2 1.2 9.2 12.0 11.2 8.1 -2.6 0.0 2.8 1.4 1.4 Spain 3.8 -0.1 3.2 8.2 19.9 19.6 7.0 -5.0 4.7 2.8 1.8 2.0 Eurozone 3.0 2.0 1.7 7.5 10.2 10.0 7.5 0.6 5.3 2.1 1.6 1.7

Japan 2.1 4.6 1.5 3.8 5.1 3.1 -1.5 -2.5 0.0 0.1 -0.7 0.8 UK 2.6 4.3 1.8 2.7 7.9 4.9 8.0 3.8 2.9 2.3 3.3 2.7 US 1.8 2.5 1.5 4.6 9.6 4.9 -0.2 0.7 1.4 2.9 1.6 2.1

Data source: The IMF’s IFS database (accessed Feb. 9, 2018). DO NOT COPY

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Exhibit 5 Draghi’s Commitment Two-Year Interest Rates in United States and Eurozone

Notes: Weekly data. Last data point: week ended February 2, 2018.

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Exhibit 6 Draghi’s Commitment Eurozone Monetary Policy

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Notes: Weekly data through February 2, 2018.

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Exhibit 7 Draghi’s Commitment Money Supply and Private Credit

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Exhibit 8 Draghi’s Commitment Inflation Rates and Economic Activity

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Exhibit 9 Draghi’s Commitment Current Account Balances as a Percentage of GDP

10%

8% Germany

6%

4%

2%

0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-2%

-4%

GIIPS

-6%

-8%

Data sources: IMF, Haver Analytics, and author’s calculations.

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Exhibit 10 Draghi’s Commitment Real Trade-Weighted Exchange Rates and Competitiveness

Doing Business Rankings 2012 2017

France 34 31 Germany 20 20 Greece 78 67 Ireland 15 17 Italy 73 46 Portugal 30 29 Spain 44 28

UK 7 7 DO NOTJapan 24 COPY34 US 4 6

Notes: Doing Business rankings range from 1 (best) to roughly 189 (worst). A better ranking indicates a more efficient business environment and stronger legal institutions. For full details on methodology, see http://www.doingbusiness.org/methodology (accessed Feb. 9, 2018).

Data source: World Bank’s “Doing Business” dataset, http://www.doingbusiness.org/ (accessed Jan. 1, 2018). Data pulled from 2013 and 2018 reports, which provide information as of March 2012 and June 2017, respectively.

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Exhibit 11 Draghi’s Commitment Government Bond Yields

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Endnotes

i Mario Draghi, “Speech at the Global Investment Conference in London,” July 26, 2012, http://www.ecb.int/ press/key/date/2012/html/sp120726.en.html (accessed Apr. 15, 2014). ii “2013 Article IV Consultation with the Euro Area, Concluding Statement of IMF Mission,” International Monetary Fund, July 8, 2013, http://www.imf.org/external/np/ms/2013/070813.htm (accessed Apr. 15, 2014). iii Quoted are Wells Fargo estimates as reported in “Draining of QE punchbowl sobers up bond bulls” (Financial Times, Robin Wigglesworth, Jan. 2 2018). iv Report on Greek Government Deficit and Debt Statistics (Brussels: European Commission, January 2010) http://ec.europa.eu/eurostat/documents/4187653/6404656/COM_2010_report_greek/c8523cfa-d3c1-4954-8ea1-64bb11e59b3a (accessed Apr. 15, 2014). v Ambrose Evans-Pritchard, “Europe Prepares Nuclear Response to Save Monetary Union,” Daily Telegraph, February 19, 2010. vi “Verbatim of the Remarks Made by Mario Draghi,” July 26, 2012, https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html (accessed Apr. 15, 2015). vii James Wilson, “Bundesbank Squares Up to ECB’s Draghi,” FT.com, March 1, 2012, http://www.ft.com/intl/cms/s/0/eb335298-63be-11e1-8762- 00144feabdc0.html#axzz1oR8CB7VU (accessed Apr. 15, 2014). viii Jean-Claude Trichet, “Introductory Statement with Q&A,” November 6, 2008, European Central Bank press release, https://www.ecb.int/press/pressconf/2008/html/is081106.en.html (accessed Apr. 15, 2014). ix Mario Draghi, “Introductory Statement to the Press Conference (with Q&A),” July 4, 2013, http://www.ecb.int/press/pressconf/2013/html/is130704.en.html (accessed Apr. 15, 2014). x “Germany on the Mend,” Economist, November 17, 2004, http://www.economist.com/node/3352024 (accessed Dec. 31, 2014). xi Jeevan Vasagar, “Bundestag Backs Greek Bailout Extension,” Financial Times, February 27, 2015.

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