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Inflation Crashes ECB's 10th Anniversary Party

Reuters
Monday, 2 Jun 2008 | 9:01 AM ET

Sky-high fuel and food prices crashed the party when finance ministers flocked to Frankfurt to celebrate the inflation-fighting European Central Bank's 10th birthday on Monday, a milestone in Europe's monetary union.

ECB chief Jean-Claude Trichet set the tone, warning that bad management of the oil crisis in the 1970s -- meaning large wage rises and low interest rates -- seriously hurt the economy and jobs, and that the errors of the past must not be repeated.

As truckers blocked a refinery in France and awaited support from taxi drivers and fishermen in the latest of protests across several European countries, France called on ministers to think about a cap on the VAT sales tax levied on fuels.

That got short shrift from others who feared tax cuts would pitch countries into a tax-slashing competition that ultimately plays into the hands of oil producers and not the oil-consumer countries of Europe.

Austria suggested a tax on speculative commodities trading.

Despite mounting protests, most ministers at the euro zone talks said governments could not and should not slash taxes or condone big wage rises to compensate for price hikes, warning this could turn a possibly short-term problem into a long-term one.

Instead, meeting chairman Jean-Claude Juncker, Luxembourg's prime minister, said ministers had set themselves the deadline of an EU summit on June 19-20 for European capitals to come up with highly targeted relief measures for the most needy.

The ministers held talks on the economy before heading to ECB birthday celebrations at a Frankfurt opera house, also being attended by central bankers and guests including German leader Angela Merkel.

Officials from the International Monetary Fund raised their growth forecast for the euro zone this year, to 1.75 percent from 1.4, more in line with other forecasts. European officials said the IMF was still being too optimistic about inflation.

On fuel troubles, French Economy Minister Christine Lagarde sought to sell to a sceptical audience President Nicolas Sarkozy's suggestion that the European Union consider capping sales tax on fuel products if prices kept rising.

German Finance Minister Peer Steinbrueck and Dutch colleague Wouter Bos dismissed that idea. "I think France already has quite a few problems in bringing its budget in order. Cutting taxes will not necessarily make it easier for them," Bos said.

Steinbrueck said Europe should stick to a collective promise made in 2005 in the English city of Manchester -- namely that no EU country should break ranks by making major tax cuts to ease the pain of high fuel costs, partly because they fear it would play into the hands of oil-producing nations. "We should stick to the Manchester declaration. That means not responding politically and trying to intervene."

Juncker, who acts as permanent chairman and spokesman when euro zone finance ministers meet, said much the same.

"In Manchester in September 2005, we agreed that due to the hike in oil prices, countermeasures of a tax nature were not in order," he told a news conference. "We stand by this declaration and we think that oil prices, and food prices as well, will remain high, and that short-term tax measures cannot really lighten the burden for all those who suffer ... from higher oil prices in particular."

In a letter released to the media as ministers met, Lagarde said France supported the EU policy but that this should not rule out short-term palliative measures.

Food and Fuel

The trouble in Europe, like the rest of the world, is that the region is being hit as well by soaring prices for food, an even bigger part of household budgets.

** FILE ** Euro coins fall out of the hands of a person in Frankfurt, central Germany, Feb. 4, 2007. The euro set an all-time high against the dollar Friday, April 27, 2007, buying US$1.3682 as fears about a U.S. economic slowdown mounted amid signs of weak growth. L(AP Photo/Michael Probst)
Mcihael Probst
** FILE ** Euro coins fall out of the hands of a person in Frankfurt, central Germany, Feb. 4, 2007. The euro set an all-time high against the dollar Friday, April 27, 2007, buying US$1.3682 as fears about a U.S. economic slowdown mounted amid signs of weak growth. L(AP Photo/Michael Probst)

Austrian Finance Minister Wilhelm Molterer said he would ask his fellow ministers to consider a tax to counter speculation in commodities futures markets. Molterer told Monday's edition of Austrian daily Kurier that roughly $40 billion had gone into commodities speculation over the past five months.

"This strong speculative element is responsible for part of the rise in prices," he said. "Politicians must act here. I will therefore put forward such a tax to my fellow finance ministers today. We'll see how they respond to it." Juncker, asked what came of the idea at the meeting, said only: "We are taking it into consideration."

Molterer noted that the idea could run into flak in Britain -- not at the meeting because it is outside the 15-country euro zone -- as it is a key centre of commodity futures trading. The recent price spikes are as much about food as oil, and even more so in poor countries where the soaring cost of food commodities such as wheat, corn and rice has a more direct and immediate impact on millions.

Dozens of leaders are due to meet this week in Rome to discuss the global food crisis to consider emergency humanitarian aid and perhaps longer-term challenges.

The prices of many food commodities have doubled in the last two years and are likely to remain high for the next decade even if they retreat from recent records, according to the OECD and the U.N. Food and Agriculture Organisation.

Inflation in the euro zone, which also risks a quite sharp economic slowdown, is running at a record 3.6 percent.

Contact Europe: Economy

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