Speaking to delegates at a Euromoney FX conference in New York this week, Smaghi, who left the ECB late last year, said the announcement of the ECB’s outright monetary transactions (OMT) programme had a substantial influence in calming the markets and preventing a collapse of the eurozone, but risks still remain. “The implementation of OMT has reduced tail risks,” said Smaghi, a visiting scholar at Harvard’s Weatherhead Centre for International Affairs. “The commitment is there, so if there are any big problems, the ECB will intervene. But this does not mean all the risk has been eliminated and one of those risks is the economy, which is going to get worse before it gets better.” According to Smaghi, this could well be the case with countries such as Italy and Spain, where it is likely they will have another 12 months of recession next year and worsening debt-to-GDP ratios, which could make financial markets nervous again. Moreover, he also cited political risks because it still is not clear if Spain and Italy will request to enter the OMT programme, or whether it is going to be needed or not. “In reality, they will wait for the markets,” said Smaghi. “If the markets continue to be benevolent, they will not ask for a programme. But if the markets start waking up at the beginning of next year as the result of the real economy turning out to be worse than expected, then maybe they will be forced to apply for a programme.” It is then that the ECB’s OMT programme will face its biggest test from the market, argue some analysts, in that, it will want to challenge Draghi’s pledge and test his firepower to ward off tail risks. “Knowing Draghi, if he will be tested, he’s the kind of person who will want to solve the problem quickly, in the sense of showing that he has the bazooka and reassuring the market,” said Smaghi, in response to a question of whether the ECB would have the ammunition to stand a test from the financial markets. And despite concerns about a worsening of economic fundamentals, there is some reason for optimism that the worst has past for the eurozone, according to the former ECB official. He said the Greek elections in June sent a clear message that the Greeks would do what is needed to stay in the euro and that this being digested in the political system has also helped reduce some of the tail risk. In addition, with the German elections next year, it would likely ensure some stability. “We have already seen Chancellor [Angela Merkel] going to Athens and Lisbon. In an election year, Germany does not want to have a crisis,” Smaghi quipped. In terms of what all this means for the euro, Smaghi said all short-term indicators suggested that one should expect a much weaker euro than is now the case – however, over the medium term, the euro should appreciate further. “If you look at the medium term, there are some elements that justify a stronger euro, he said. “One is the fact, as a result of the adjustment, the euro’s current account surplus is going to improve, because the countries that are in it are moving to surplus.” Moreover, he said, the euro area will have lower inflation, and he reiterated there is no room for discussing a loosening of the inflation target. Monetary policy would almost certainly remain conservative, and that will be an element for a stronger euro over the longer term. Other supporting factors were that international investors did not want to be only long US dollars and the rest of the other G10 currencies were not liquid enough to hold a substantial portion of reserves.