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Should ECB Be Applauded for Raising Rates?

Many people will applaud the ECB for having the guts and finding the room to re-establish it's inflation-fighting credibility and to step in where the Fed can not because of the state of the American housing market.

European Central Bank
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European Central Bank

It's important to realize that while headlines may be grabbed by Portugal, Ireland and Greece they are just 6 percent of the euro zone's economic power. Where as Germany and France make up 47 percent.

Crucially—across the euro zone—consumer Inflation is running at 2.6 percent, above the ECB's 2 percent target. And unlike the Fed the ECB is neither distracted by a mandate to protect jobs nor by arguments about 'core' inflation.

In other words it doesn't strip-out food and energy in its analysis; the ECB looks at the effect of all price rises on citizens and crucially whether they will in turn trigger higher wage rises (which Trichet calls 'second round effects').

In Germany half a million chemical workers just asked for a 7 percent pay rise—and got 4.1 percent.

People often criticize the euro eone for "one size fits all'. But—in reality—that's NOT currently true. Unlike the Fed—the ECB is still massively propping-up troubled banks. And IMF/EU are propping up Greece, Ireland—and soon Portugal.

As for the euro—it's been an almost a one way bet. Traders tell me not because of anything to do with Europe's internals. But because the Middle East oil producers and Asian central banks keep getting Dollars that they don't want—and the only other currency zone deep enough to diversify in to is the euro.

Contact Europe: Economy

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