ECB Should Pledge to Not Do Anything Stupid

By Feb 25, 2013, 7:42 PM Author's Blog  

Market participants were rattled today by the election news out of Italy, as it looks like the economically-challenged nation is now politically adrift.  But what exactly might worry investors?  I pulled this quote from Bloomberg:

“We don’t want to see more chaos out of Europe,” Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in a phone interview. His firm oversees more than $20 billion. “Any question about whether or not Italy would be committed to austerity measures after the elections gets investors concerned.”

Why should we be concerned that Italy backslides on its commitment to austerity?  After all, evidence of the economic damage wrought by such policies continues to mount.  If anything, a reversal of recent austerity should be welcome.

I suspect, however, that it is not the austerity that worries market participants.  It is the fear that European Central Bank head Mario Draghi will threaten to pull his pledge to do whatever is takes to save the Euro in the face of Italian intransigence.  The fear that European policymakers are about to partake in another grand game of chicken that once again will bring the sustainability of the single currency back into question.  In short, I think that market participants fear tight monetary policy much more than loose fiscal policy.

I am very much hoping that the ECB will keep calm and not do anything that encourages market participants to once again doubt the central bank’s commitment to the Euro.  Otherwise, this spring and summer will look much like last year’s.  And the year before that. And the year before that.

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