Europe Preview: ECB Inflation Stance Angers Members

Those of you familiar with the work of UK comic Harry Enfield will no doubt enjoy his take on the teenage condition.

Kevin & Perry, the adolescents whose tag line was ‘It’s so Unfair” and who constantly argued with their parents, remind me of the ECB and those who depend on it fight against inflation.


For the last 10 years, Jean-Claude Trichet and his predecessor Wim Duisenberg (the parents) have told the majority of European member states (the teenagers) exactly what they didn’t want to hear.

The French, the Italians and the Spanish alike have lobbied politicians hard to stand up to the ECB and its one-size-fits-all monetary policy; and, like teenagers wanting to stay out late, all have been denied by the bad guys in Frankfurt.

The conflict has its roots in the days preceding monetary union.

If Italian fashion labels weren’t selling enough products in the early 1990’s, the industry would simply push Rome to devalue the Lira.

If the Franc became too strong and agricultural subsidies weren’t enough to stop French farmers from revolting, France could always cut interest rates.

Ten years after the creation of the ECB, many of these tensions still exist.

The economists among you will no doubt be aware of the ECB’s success stories, but it’s not clear if the majority of those living in the Euro Zone are.

OK - so the euro is now a plausible rival to the dollar. Inflation has been lower in the last 10 years than the previous decade. Trade between member states is higher and government deficits across much of the Euro Zone are lower.

Fantastic! But try telling that to the teenager when growth is below that of the UK and US, unemployment remains close to 10 percent and that they’re unlikely to find anything but bar work well into their mid-20’.

Politicians, like teenagers, have a lot of problems right now.

If teenagers fret over acne, dating and homework, politicians across Europe are fretting over poor job growth, soaring oil prices, a very strong euro and competition from China and India.

As a result the politicians’ knee jerk reaction has been to call on the ECB to cut rates in order to help support growth.

The ECB has in turn told member states to back off as it attempts to stop inflation getting out of hand.

France and Italy have been the main culprits but pressure is also now growing in traditionally conservative and ECB supporting countries like Germany.

What is becoming clear though as inflation begins to get out of hand is that if the ECB had given in to the politicians, interest rates would have to rise considerably over the next 12 to 24 months.

The one-size-fits-all remit of the ECB may have led to excess in countries like Spain and Ireland and weak growth in Germany for much of the last 10 years but given the hand it was dealt the ECB has done a very good job parenting Europe’s member states, so good in fact, much of eastern Europe now wants to join the nursery.