Europe Economy

Commentary: All Quiet on the Peripheral Front?

The European Central Bank started the clock ticking towards an interest-rate rise that, if history is any guide, will now probably be delivered in April.

The central bank is clearly determined display its inflation fighting credentials. But this is not the whole story.

The use of the phrase “strong vigilance” is not just a monetary statement. It is also a political one.

It is as much about signaling a rate rise as it is about putting a shot across the bows of the region's politicians. In short it is a coded message that Merkel, Sarkozy and co. need to focus their minds and solve a peripheral crisis that, despite the markets recently relaxed stance, still has its hands on the euro's throat.

Trichet, who is not meant to be a politician, has a sizable ally in his fight to get the European Council moving and it comes in the form of the European Parliament.

MEPs are angry about being left on the "periphery" of Germany and France's competitiveness pact push and are straining at the leash to get involved in the fight.

But Trichet is playing a dangerous game.

The euro zone's two largest countries have demonstrated of late a desire to override the desires of smaller countries. This stance could lead to a critical Council meeting at the end of March delivering very little. It could create the conditions for the outbreak of institutional warfare in Brussels.

This outcome has the potential to quickly refocus the market's attention back to the problems of the peripheral countries and away from the expected rate rise.

Portugal is on borrowed time and Ireland and Greece both need to undergo some form of debt restructuring.

This brings us to another of the potential problems that Trichet faces over the next month: the start of the bank stress tests.

While the results of the tests will not be known until the summer, we will over the next few weeks learn more about the methodology that is to be used.

What should become clear is that the inevitable peripheral restructuring story will mean that the euro zone's banks will need huge cash injections to keep functioning. With the region so dependent on its banks to make credit available this could be a disaster.

So, while the ECB may have decided that it wants to raise rates, delivering that rate rise could be much harder. There are so many bumps along the road between now an April that the difference between rhetoric and reality could be substantial.