Another Round ...

2005-09-13T065756Z_01_NOOTR_RTRIDSP_2_OFRBS-FRANCE-PRIX-DETAIL-BS-20050913.jpg... of the differences between the ECB and Eurozone finance ministers. It is not that we have not seen this before and it will not be the last. The agenda is well-known. The ECB maintains its vigilance against inflation whereas many of the zone's finance ministers claim that inflation is well under control and find it an un-gratifying task to make their budgets abide to the Maastricht criteria with the ECB breathing down their back with raises in the interest rate around the corner in December.

(From the FT - bold parts are my emphasis.)  

Europe’s economic policymakers clashed on Tuesday over whether higher interest rates are needed to contain inflation, as the region looks forward to another two years of strong growth.

Hawks at the European Central Bank are troubled by the inflationary outlook, with one member of the bank’s rate-setting board claiming that the rise in consumer prices and credit was “alarming”.

But some EU finance ministers meeting in Brussels take a more dovish stance, pointing to the European Commission’s autumn forecast which shows inflation set to fall below the ECB’s 2 per cent target in 2008.

Karl-Heinz Grasser, Austria’s finance minister, spoke for many when he said: “Core inflation is absolutely under control – it’s going back.”

The debate reopens tensions last seen at the end of 2005 when finance ministers publicly urged the ECB to refrain from rate rises, fearing it could snuff out a nascent recovery. Most ministers now privately admit they were wrong.

Today some ministers believe the ECB is unnecessarily spooked about the prospect of inflation and that rate rises could hold back eurozone growth, forecast for 2.1 per cent in 2007 and 2.2 per cent in 2008.

The debate was taken up on Monday by Axel Weber, the Bundesbank chief and Germany’s member of the ECB’s rate-setting council, who used strong language to describe forecasts that consumer price inflation could top 2 per cent in 2007.

“It’s a signal that I find alarming,” Mr Weber said when asked about credit and price growth in the 12-country euro area. His comments were deemed inappropriate by Pedro Solbes, Spain’s finance minister.

Mr Weber’s comments reflect ECB fears about inflationary pressures in the pipeline resulting from the fast rate of economic growth and interest rates that it still regards as low.

Last week, Jean-Claude Trichet, ECB president, described inflation risks as “clearly on the upside” and stressed the rapid pace at which eurozone lending is expanding, especially to businesses.

The ECB has signalled another quarter percentage point rise in its main interest rate to 3.5 per cent is almost certain in December.

So who is right? Well, I have argued continously here at Alpha.Sources that I think the ECB is playing into the hands of the impending recessionary outlook for the Eurozone going into 2007 raising rates. Inflation is below target as a result of a dropping headline and the recovery itself is anything but sustainable. However, the broad based monetary indicator (M3) is still above target and corporate and private lending remains buyoant. But do I really side with the finance ministers here?

It really does not matter in this case since the real point here is that the ECB is a central bank and as such (should be) independant from policy. We have had this discussion before and despite all my rants about the inherent problems of the Euro as a project the independance of the ECB as an institution is very important ... if it was to become a quasi-political forum we might as well shut the whole thing down. Underneath this is of course the underlying paradox of the ECB's task of keeping a single interes rate to suit all Eurozone economies faced with huge strucutural imbalances which in my opinion (and get ready here) first and foremost are driven by the widely differing population structures of the Eurozone countries.