Britmouse has done a short but effective take-down on Draghi´s speech. Draghi´s first headline is: “Five years of monetary policy – the ECB has delivered” which Britmouse amended to: “the ECB has delivered (Depression)”.
I just want to ‘color it up a bit’ and do a comparison with the US. As Scott Sumner has showed for the umpteenth time, Fed policy was pretty bad. The ECB has done even worse, and all in the name of the sacrosanct inflation target. This from Draghi:
In the last five years, the ECB has continued to take the necessary measures with a view to maintaining price stability in the euro area.
Let me turn back to the first hearing of this Parliament’s term which took place with my predecessor in September 2009. At the time, the economy was just bottoming out in the aftermath of the great contraction which had ensued after Lehman’s failure. We were witnessing negative inflation rates. In this environment, the outlook was seen to be broadly in line with price stability. Inflation was projected to increase toward levels close to 2%. The key ECB interest rates were kept on hold at the very low level to which they had been brought in several stages since the autumn of the preceding year. Some phasing-out of non-standard measures was announced.
However, in May 2010, sovereign debt markets froze in various euro area Member States. Financial fragmentation took a new and unfamiliar form, with financial conditions and the transmission of our monetary policy varying to a great extent across Member States. We responded by introducing the Securities Markets Programme, focused on purchases of government bonds.
Initially, while the economic impact of the sovereign debt crisis was limited and largely confined to vulnerable economies, the rapid global recovery put upside pressure on energy prices. This drove up inflation also in the euro area. We decided to raise interest rates in early 2011 given upside risks to the medium term inflation outlook stemming from energy prices and from ample monetary liquidity.
However, the sovereign debt crisis deepened and the euro area entered a second recession.
Britmouse correctly notes that the last “however” is out of place and should read: “We raised interest rates and naturally the Euro area then entered a second recession.”
And the “blame Lehman” meme is the biggest cop-out eagerly embraced by most central bankers!
The charts compare the Eurozone and the US. The behavior of both headline and core inflation is very similar in both places. Policy rate setting, on the other hand, is very different. While in the US rates started coming down right after the Bank Paribas affair in early August 2007, in the EZ they stayed pat. In June 2008 we read from the FOMC minutes:
“With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate; indeed, one member thought that policy should be firmed at this meeting.”
The ECB had no such qualms. It increased rates the next month!
The mistake of the rate increase in April and June 2011 is awesome, but to the ECB it was the correct move! Facing the same headline inflation increase due to oil prices the Fed didn´t follow the “path to perdition”.
The upshot of the accumulated mistakes by the Fed and the ECB is seen in the depressive state that their economies got stuck. In the EZ the situation in some regions (countries) is even worse, with those actually experiencing deflation.