Good central bankers ride the curve and expectations, and not viceversa. And what a good central banker Mario Draghi was at his first show. Markets were surprised.
Did we think that Super Mario had to show to everyone that he was not an Italian but rather more teutonic than Mr. Trichet? That would imply thinking that what he did today by lowering rates was a favor to Italy. Mistake number 1. That was a favor to Europe.
But there is more than simply that. Markets have learned something extraordinary today: that the European central bank has simply changed its preferences. That the ECB is closer than ever it has been in its entire life to the Federal Reserve and its mandate, that looks at both inflation and employment. Well summed up by today’s statement by Dr. Draghi: “Overall, it remains essential for monetary policy to maintain price stability over the medium term, thereby ensuring a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make its contribution towards supporting economic growth and job creation in the euro area.”
Mistake number 2 was forgetting that Dr. Draghi has studied at MIT. Not only he has created a solid network of friends over there. His brain thinks in an American way. This is what happens when you go and study in the Land of the Free. We can safely bet that the transatlantic phone bill between Frankfurt and Mr. Bernanke’s office will rise as it never did under Mr. Trichet’s tenure.
Now that things are set again in the right direction for European monetary affairs, let European governments take action. Fiscal expansion of public demand is what is required right now to make growth start again. Sadly, I would not bet one dime on it, too much orthodoxy in Bruxelles. But Cannes is far enough from the cold and dull weather that slows down intuition and courage and is the perfect setting for a festival of the (right type of) economics. Keep fingers crossed.