European Central Bank president Mario Draghi surprised markets last Thursday by cutting the Bank’s benchmark interest rate to a record low 0.25 percent (as low as the federal funds target rate in the U.S.). Explaining his decision, Draghi—the person who deserves most of the credit for the lull in the euro crisis over the past 15 months—noted that “monetary and, in particular, credit dynamics remain subdued” and that monetary policy must remain accommodative in order to “assist the gradual economic recovery” taking hold in the Eurozone. In other words, monetary policy must remain extremely loose to prevent Europe from sliding into a Japan-style period of protracted stagnation.
Those pesky European voters have done it again. Last spring the Greek electorate, choked by recession and austerity, nearly gave the reins of government to a hard-left, anti-reform coalition. Now it’s Italy’s turn to throw the plans of the Eurozone high command into disarray. As results of the two-day parliamentary election began streaming in on Monday, Brussels, Berlin, and Frankfurt (seat of the European Central Bank)—not to mention the global markets—looked on in horror.
Mario Monti’s announcement last Saturday that he plans to resign his post as Italy’s prime minister earlier than was previously expected has thrown Italian politics, and the whole Eurozone, into renewed turmoil. Monti, a Yale-educated technocrat and former EU commissioner, took over in November of last year after market pressure forced Silvio Berlusconi to quit in order to prevent the ignominy of Rome having to apply for an international bailout. The plan was for him to serve the rest of the parliamentary term, until elections scheduled for no later than April 2013.