Europe Drops Into Monetary Madness…(US too! Welcome!!)
Perhaps it’s crisis fatigue, but monetary policy in Europe seems to have descended into madness.
By Jeremy Warner
07 Jul 2011
With much of the eurozone (inflation rate 2.7pc) flirting with insolvency, the economy visibly slowing and money growth barely positive at all, Jean-Claude Trichet and the rest of the European Central Bank governing council think the time is right for another hike in interest rates.
Meanwhile, in Britain (inflation rate 4.5pc and rising), the Bank of England is sticking rigidly to the idea that the spike in prices is temporary and that the current zero interest rate policy should therefore be maintained.
Should it not be the other way around? A visitor from Mars would make Sir Mervyn King and Jean-Claude Trichet swap jobs, and then we might see sense prevail in both economic jurisdictions.
With the ECB, it will be recalled, current events almost exactly mirror what happened three years ago when, with commodity prices spiking in the last hurrah of the boom, the ECB saw fit to implement its “strong vigilance” and increase interest rates. Personally, I don’t buy the view that this ill-judged tightening precipitated the Lehman Brothers collapse, but it certainly didn’t help. It was just the wrong moment to be raising interest rates. Within a few months, the ECB found itself desperately cutting them again.
Now history seems to be repeating itself. Substitute Greece, Ireland and Portugal for Lehman’s, AIG and Merrill Lynch, and you have an almost perfect replay of events back then, only this time it’s happening in the ECB’s own back yard and it is whole countries, not just banks, which are threatening to go under.