I, too, believe Italy needs to reform. But slow progress on that score has nothing to do with Italy’s economic performance in the last quarter. After all, Germany also declined by the same percentage, while unreformed France did better, managing to avoid a contraction.
The ECB is failing to deliver on its inflation target not because it has run out of instruments but because it has based its policy on a poorly performing economic model. The ECB never expects inflation to deviate from the target of just under 2 per cent. Yet each month inflation undershoots, and the ECB is apparently taken by surprise. Because it relies on inaccurate intelligence, the ECB has committed three errors over the years.
First, the ECB should have embarked on large asset purchases and cut interest rates to zero early on in the financial crisis. It did neither. This level of support was needed even more urgently in the eurozone than in the US, because fiscal policy in Europe was much tougher. This was compounded by the decision to raise interest rates briefly in 2008 and in 2011, when the ECB governing council expected a recovery that never happened.
The second mistake was Mr Draghi’s promise to buy eurozone government debt in the secondary markets, known by the official name of outright monetary transactions. This surely helped the bond market to recover, and took the heat out of the eurozone crisis. But it was at best a partial victory because it made everybody, including the ECB itself, complacent. OMT ended all crisis resolution.
The third mistake was to misjudge the dynamics of the fall in inflation rates late last year. Core inflation, which excludes volatile items such as food and energy, has been fluctuating around 0.8 per cent since November. Yet each month at his press conferences and in speeches Mr Draghi repeats the mantra that “inflation expectations are firmly anchored” at close to 2 per cent. He reminds me of Cato the Elder, the Roman senator, who ended all of his speeches in the Senate with the remark that Carthage needed to be destroyed. The difference is that Cato was right.