Just an obvious point that I’m not sure enough people have been making: Mario Draghi’s surprise rate cut is, in effect, a repudiation of the nascent triumphalism of Europe’s austerians.
Those who follow these things probably noticed that just a few weeks ago the austerians — Olli Rehn in particular, but many others too — were hailing signs of a bit of economic growth this quarter as vindication of their policies for the past four years. Yes, it was silly — I mean, I could keep hitting myself in the head, then slow the pace of the punishment,and I would start to feel better. Does this mean that hitting myself in the head was good for me?
Still, there it was. But then the ECB took a look at more relevant indicators:unemployment still rising, core inflation dropping below 1 percent (Japan here we come). And it seems to have gotten very worried.
Put it this way: the ECB wouldn’t be slashing rates if it thought Europe had turned the corner.
There are many fantastic reasons why Eurozone austerity was useless, this just isn’t one. The fact that the ECB could cut rates – that is, stimulate the economy – suggests that monetary policy was not neutered by a liquidity trap (though now it is) and hence austerity would not have been as harmful had Jens Weidmann actually understood a thing or two about economics. Of course, if the natural interest rate is negative a rate cut won’t be enough, but it certainly doesn’t increase the case for austerity. This is what Scott Sumner would call monetary offset. (Which is too strong a concept for me at the zero lower bound, but perfectly sensible for the jokers at the ECB – until now).
By the way, one of the best arguments against austerity is distributional, at least in the United States where middle class taxes are relatively low.