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Mr. Draghi’s speech. AAA vs. CCC

“Let me use this occasion to dwell a bit further on monetary policy in the current environment. Three principles are of the essence: continuity, consistency and credibility. Continuity first and foremost refers to our primary objective of maintaining price stability over the medium term. Consistency means to act in line with our primary objective and with our strategy both in time and over time. Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence. Gaining credibility is a long and laborious process. Maintaining it is a permanent challenge. But losing credibility can happen quickly – and history shows that regaining it has huge economic and social costs. These three principles – continuity, consistency and credibility – are at the root of the Governing Council’s outstanding record during the past 13 years in terms of price stability and anchoring inflation expectations.”

A message that we don’t like as you know. Especially since, in his own words, “In the euro area, downside risks to the economic outlook have increased, and the weaker degree of activity will moderate price, cost and wage pressures.” More than that, we think it appropriate to remind our Governor of the 3 AAAs that should support his policies even more than the 3 Cs:

Awareness: What is at stake is not the ECB. There is no ECB without Europe. And there might be no Euro(pe) without an ECB that is aware of this. A necessary but not sufficient condition, all right, since we still need politics and governments to step in, but a necessary condition nevertheless.

Attitude: Mr. Draghi’s attitude is critical. What will matter is how he will be able to surprise markets that are anchored to boredom and inflexibility when it comes to reading ECBs wording. His mandate in the first months will be decisive in shaping expectations regarding monetary policy for the whole of his mandate. He cannot waste these first months.

Adventurousness: Not your typical word for a central bank or a central banker, you might say. Not true. See the title of the memoirs of Alan Greenspan, The Age of Turbulence: Adventures in a New World. In it he writes, “After a lifetime observing how the world works as a business economist on Wall  Street, it was exhilarating to be at the center of international monetary policy making.” Indeed Mr. Draghi is there now (the fact that Greenspan is a bit in disgrace now not mattering much to the point). His adventure is just starting, and it is our adventure too, one of ensuring as he says today “that the gains achieved are firmly secured for future generations”.  So play the game for the large picture, dont fall prey to the smallness of tiny Frankfurt.

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