The fantasy lives of European Central Bankers?
Buttonwood in the Economist, discussing the recent fall in the Euro versus the dollar:
Weak economic growth in Europe is also taking its toll, with Italy back in recession and France and Germany just this side of it. This has forced some rewriting of the European Union’s central tenets. In March, a “lite” version of the stability and growth pact, the EU’s fiscal rules, was agreed in Lisbon in order to accommodate budget-busters including Germany, and the drive to liberalise services was stymied. This week, in its biannual economic outlook, the OECD issued the clearest possible warning about slowing growth in the euro area, saying that economies were suffering from a “chronic pattern of weak resilience and divergent activity” and that a cut in interest rates was of “central importance”—not only for the growth of the countries involved but also “for the credibility of the Economic and Monetary Union itself”.
Currency and bond markets are reflecting this malaise. The euro has fallen from $1.36 at the end of last year to about $1.26 now—its lowest point in more than seven months. Nor is its future as the reserve currency of thinking central bankers everywhere as assured as it seemed a while back. There is talk that some Asian central banks which sat on their hands at America’s Treasury auction in March, with a view to diversifying their foreign-currency reserves into euros, among other things, are back in the market for dollar-denominated assets.
We wondered what the heck was going on, with the OECD calling for the ECB to cut interest rates, and the European Central Bank telling the Organization for Economic Cooperation and Development to get stuffed:
“With domestic demand sluggish, resilience feeble and possible upward pressures on the euro looming ahead, the balance of risks on growth and inflation is clearly tilted to the downside, calling for an early easing of monetary policy,” the OECD said. Analysts doubt that the ECB will cut rates given that it has kept its main refinancing rate at 2.0 percent for two years despite the weakness of the euro zone economy and has said repeatedly that it does not view easing as an option.
ECB Governing Council member Klaus Liebscher criticized the OECD’s remarks, telling a news conference: “An interest rate cut … would not be in the service of the credibility of the euro system or the inflation expectations of actors in the financial markets.”
Now we understand. The ECB apparently fancies the Euro as a new reserve reserve currency — supplanting the dollar just as the dollar supplanted the pound over half a century ago, through superior monetary discipline. Jean-Claude Trichet, who heads the ECB, via WSJ:
The ECB president also weighed in on a debate re-emerging in Europe about whether a one-size-fits-all monetary policy can work for a region where Italy is in recession and Spain is booming. Mr. Trichet said that the difference “does not appear exceptional from a historical perspective” and that such variation is a “standard feature” of big currency areas such as the euro zone and U.S.
The ECB chief demanded more fiscal discipline in Europe. In the latest flouting of the EU’s fiscal framework, Italy’s budget deficit surpassed the EU limit of 3% of gross domestic product in 2003 and 2004, according to an upward revision by the EU’s statistics office published yesterday.
Mr. Trichet declined to entertain the possibility that France and the Netherlands might reject ratification of the European Union constitution in coming referendums, as polls suggest. The ECB would like to see greater political integration to minimize the challenge of managing a single currency for many nations.
Apparently the ECB is not primarily about the growth of European economies; it desires the firm establishment of a European currency as goal number one. The divergence in economic growth is a “standard feature” of major currency areas, like the US and EU. We will have to see whether a single currency can be maintained across a region of such diverging economic performances.