Saturday, April 14, 2007

The Euro continues to tank

At first it was too weak; now it's too strong.

This problem was obvious. Setting interest rates that are suitable for both the manufacturing North of England and Southern house prices is a challenge for the Bank of England. Setting a single rate for the rapidly growing new EU entrants, Ireland's celtic tiger and the soporific Western European economies is a nightmare for the ECB. Now the politicians, particularly the French, want a greater say in Central Bank policy.

Central bank independence is important as it makes it credible that the bank will act to curb inflation, which can be politically costly. This credibility makes it much easier to keep inflation down without high interest rates. If the market believes the central bank will act to curb inflation then pay deals, for example, to secure the desired pay increase and expected inflation will result in a much lower inflationary pressure.

If the French succeed in making the ECB subject to political control then the Euro will become even more of a liability than it is right now.

1 comment:

Steve_Roberts said...

Isn't the fundamental issue that the interest rate is 'set' by bureaucrats rather than being a matter solely for lenders and borrowers ?