On Thursday, Mr. Draghi held a press conference. But the real thunderbolt hit on Monday, when Ms. Merkel announced that she would step down this year as a leader of her conservative party. Will that lighting make gold shine?

Draghi Says That We Shouldn’t Worry

Let’s start with the latest ECB’s monetary policy statement and the following Draghi’s press conference. In short, the ECB kept its monetary policy unchanged, which means that the European quantitative easing will end in December 2018. Given a somewhat weaker economic momentum in the euro area and the turmoil in Italy, the lack of any changes might seem to be rather hawkish. However, the expansion of the euro area economy continues, while inflation pressure is gradually rising. According to Draghi, we should not worry about the weaker momentum, as “it’s simply that we’re having growth returning to potential after 2017, where it was clearly above potential.”

The Q&A part was understandably dominated by inquiries about the situation in Italy and its potential impact on the ECB’s actions. Draghi noted that there were some spillovers to other countries, but they were limited. Although he expressed confidence that an agreement between the Italian government and the European Commission would be found, Draghi acknowledged the sovereign-bank doom loop:

But certainly, these bonds are in the banks’ portfolios. If they lose value, they are denting into the capital position of the banks; that’s obvious, so that’s what it is. As I said, I’m still – I shouldn’t say optimistic – but I’m still confident an agreement will be found. But basically, yes, you have a dent in capital position. Then, of course, you have weakening funding conditions as well and all this is going to translate into different lending terms.

To be sure, the balance sheets of Italian banks have improved since the Great Recession, but they used much of the injected capital to buy more sovereign debt. Italy’s financial institutions hold the highest share of state obligations in the euro area, which is now one of the greatest downside risks in the global markets.