Column : Positively contagious

The term “contagion” has tended to be used in financial markets to refer to the way that problems in one country (such as Greece) can so unnerve investors that they cause difficulties in other countries (for example, Portugal, Spain and Italy). Draghi, though, seems to be using the word more broadly to cover the whole panoply of vicious cycles that had been sucking the eurozone into a whirlpool.

The ECB president is right that the vicious cycle in financial markets has given way to a virtuous one. The best measure of this is how peripheral bond yields have dropped since he said last July that the ECB would do whatever it took to preserve the euro—“and believe me, it will be enough”. Spanish 10-year yields have fallen from 7.4% to 4.9%, while Italian ones are down from 6.4% to 4.1%. The Stoxx 50 equity index, meanwhile, is up 12%.

But vicious cycles don’t just apply to financial markets. They also affect the real economy and politics—and flip back then into the world of finance. Until Italy and Spain stop shrinking, the risk of tipping back into negative contagion remains.

Remember, too, how financial markets can be fickle. Only a year ago, confidence was buoyed

... contd.