Sunday, November 17, 2002


Despite the fact that central banking decisions are meant to be shielded from political pressures, the governing council of the ECB is inevitably coming under growing pressure, simply because the introduction of the Euro was a political, not an economic, decision, and the complexities of making it operational are not widely understood.

Many commentators criticise the bank suggesting that it is not sufficiently responsive to public opinion.(Obviously Duisenbergs obscurantism doesn't help here). In fact the opposite situation really would be a problem. Look at the difference between fiscal and monetary policy in the EU. Fiscal decisions are taken by politicians who are far more tied to public pressures and votes - ie they make decisions with a very short-term time horizon. What happens. You get to be on the 3% deficit ceiling before the problems even start, then when things get tough you cry foul, there is no flexibility (a la Prodi).

Duisenberg faces three tough problems. One is credibility - his, that of the bank, and that of the Euro. Two is really being able to measure consequences, as he says in the press release, uncertainty about the future is very high right now, and even if it weren't the capacity of the central bank to predict changes in inflation and unemployment is nowhere near as extensive as is popularly imagined. Three is the fact that the EU economies are far from homogenous.

If we start from the idea that what matters are real, not nominal interest rates. Then since Germany has 1% inflation (and dropping), the ECB rate of 3.25%represents a real rate of 2% - far two high. Spain, on the other hand, has an inflation rate of 3.5%, thus the real rate in Spain is -0.25%, ludicrously low for a country with a chronic inflation problem.

The present rate is bad for both countries. So what do you do, raise or lower, take your pick? Obviously depending on whether you're German or Spanish you may take a different view. And if you are Irish or Italian, or Dutch or French. Why, oh why, you may well ask, did anybody dream up the idea of the Euro in the first place? DW-World is of course German:

As the ECB keeps interest rates constant, Germany’s new economic Super Minster has renewed calls for the European Central Bank to help its flagging economy by cutting interest rates. Germany’s Minister for Economy and Labor, Wolfgang Clement, made an indirect call on Friday to the European Central Bank (ECB) to lower its interest rates after the bank decided to keep monetary policy constant for the 12th month in a row. Speaking at a forum of the Rationalization and Innovations Center for the German economy on Friday, Clement implied that the responsibility for German economic growth was not solely that of the German government and that the ECB should help by lowering interest rates in the eurozone. "In order to have a consistent policy for growth and employment [in Germany], others have to do their homework, too," Clement told attendees at the forum in Berlin. "The tariff policy or European monetary policy is part of that," he added.

Speaking to journalists in Berlin, the head of the Federation of German Trade Associations Michael Sommer joined the chorus of calls by German trade unions to put life back into Germany’s flagging economy. "How long will politicians in Europe stand by and watch while the ECB pursues an interest rate policy that does nothing for job creation?" Sommer asked. A cut would be good news for Germany, which has admitted it will exceed the 3 percent budget deficit allowed under the Growth and Stability Pact rules. Currently the country’s economic growth is crawling at some 0.3 percent. With unemployment figures at the four million mark and experts predicting no end in sight to Germany’s economic malaise, calls to change eurozone monetary policy are likely to grow louder every day.

Of course a cut would be good news for a lot of hard-pressed German companies. But what if the price is sending Spain, Greece and Portugal, via an inflation straight jacket, down the road, recently trodden by Argentina, of stagflation and suffocation? Will the need to cut then have been so obvious?

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