Euro crisis 2.0? Not so fast

10 years after ECB pres ident Dragh i quelled fears of a breakup of the euro area with his “whatever it takes” speech, the euro area is facing yet another potential crisis. As the ECB is embarking on a gradual normalization course, underlying fault lines of the monetary union are becoming visible again, triggering bad memories of the summer of 2012. While today’s situation has some resemblance with the 2012 crisis – not least an even higher debt level in peripheral countries – there are important differences , that make a replay of 2012 unlikely. Foremost, the ECB has signaled quickly its clear intention to keep peripheral spreads within a certain range with the help of a, soon to be announced, “ anti-fragmentation ” instrument . Although there are some legal hurdles that need to be passed, we expect these to be cleared and the ECB to intervene in peripheral bond markets as deemed necessary. Notwithstanding the ECB’s ability to keep spreads in check, its fight against fragmentation leads to some difficult long-term questions regarding the economic management of the monetary union. Whether the ECB’s anti-fragmentation instrument is in the end only a “kicking - the - can - down - the - road” exercise or a bridge to a new stable equilibrium will crucially depend on the medium-term growth outlook for peripheral countries, in particular Ital y.