Sunday, January 29, 2012

Fear and greed in the eurozone

by Gavyn Davies

Financial Times

January 29, 2012

According to reports from Davos, the consensus among global economic leaders is that the most dangerous phase of the eurozone crisis may now be over. Mario Draghi has emerged as the hero of the hour. By using the central bank balance sheet aggressively to stem the credit crunch, the ECB President has dampened bankruptcy fears in the financial system, and talk of “another Lehman” has died down. But while market fear is on the wane, greed has not yet taken over, and that leaves much work for the central bank to do.

It is striking that financial markets have become much more forgiving of bad news from the eurozone since the ECB acted in December. This week’s problems in Greece and Portugal have not caused the contagion which would have happened last year.

Furthermore, there are signs that greater confidence in the financial system has already spilled over to the real economy. The PMI and IFO business surveys which were published last week were considerably more upbeat than expected, and they have triggered the first upgrades to eurozone growth forecasts seen for many a long day.


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