What is the Draghi Effect
The Draghi Effect is an expression that came about from the calming effects that pronouncements from European Central Bank (ECB) President Mario Draghi had on global financial markets.
Breaking Down Draghi Effect
The Draghi effect is in part due to the significant credibility that Mario Draghi possesses within the community of global financial markets. Mario Draghi assumed the office of President of the ECB in November 2011, after 15 years as a professor of economics and two decades in the public and private sector. His experience includes work with institutions such as the World Bank, the Italian Treasury, Goldman Sachs and the Bank for International Settlements. During his time with the Italian Treasury, he served as chair of the committee set up to revise Italy’s corporate and financial legislation, and drafted the law that governs Italian financial markets, which became known as the Draghi Law.
The Draghi effect came into play as he assumed his position in the wake of an economic crisis among a few of the EU nations. Yields on sovereign bonds of various embattled European nations, such as Greece and Spain, were at historically high levels. Draghi comments helped ease investor concerns and helped support demand for those bonds. The result was a significant reduction in those nations' cost of borrowing which had a positive impact on the financial outlook for those countries in particular and for the EU in general. The Draghi effect also tends to drive up the value of the euro, and helps support the return of investors' appetite for risks, which can lead to a rally in equity markets. In short, the Draghi effect caused the European sovereign debt crisis to look less gloomy and helped improve the view of the global macroeconomic outlook.
Background of Draghi Effect
Between 2009 and 2011, Draghi was the Chairman of the Financial Stability Board (FSB), a Basel, Switzerland-based international organization that has representation from the G-20 group of major economies. FSB works by screening and assessing global financial systems with a focus on financial vulnerabilities. It also recommends important changes to address any vulnerabilities it identifies. Draghi also served as the governor of Italy’s central bank, Banca d’Italia, between 2005 and 2011. Prior to that, he was with Goldman Sachs as vice chairman and managing director. This combination of academic and professional experience gives Draghi a level of credibility that is perhaps only matched by former Federal Reserve Chairman, Ben Bernanke, during his time of leadership of the US Federal Reserve. Draghi’s term as head of the ECB expires in November 2019.
Draghi is credited with handling one of the toughest jobs in the world, including maintaining growth and stability in the large European Union region, which is extremely diverse economically, politically and socially. In fact, he earned his nickname "Super Mario," for his impressive ability to navigate complicated European politics. As president of the ECB, Mario Draghi has presided over an area of disintegrating faith in the EU, perhaps most notably evidenced in the results of the 2016 Brexit vote with the UK's decision to leave the EU.