Why does the ECB does not lower its interest rates?

Article published on Feb. 7, 2008
Article published on Feb. 7, 2008
We can't say it's a surprise, really. We had been expecting it for a few years but thats is, the European Central Bank (ECB) said it, the inflation risks in the Eurozone are real . So  the ECB worries, anguishes and and hunts down high inflation policies. Starting with the most impopular measures.
It has recently  denied the validation of a European agreement on salaries, aimed at indexing them on the stock exchange, because that could trigger an inflationary vicious circle. Likewise, it refused to lower the interest rates after the financial crisis of January, 21rst, thus provoking a new low on the European stock exchanges. 

Once again, critics will flourish about the policies decided in Frankfort and the disadvantages of the euro. After two decades of relative monetary stability, the Europeans seems to have forgotten to what extent inflation could be disastrous for an economy. The enthusiasm of the 1rst of Jannuary 2002 is long forgotten, when people lined up at the ATMs to withdraw the freshly printed euro bills.  Now we are only talking about the rise of prices, international competitivity problems and high interest rates. All of which to be blamed on the ECB, which only focuses on inflation and not on growth. 

This is all very true.  But  more importantly today the question is:  why is it so? The Federal Reserve Board, the American Central Bank, is also independent from the states, plus  was managed for a very long time by the aging, conservative Republican Alan Greenspan. Yet, the Fed has been more reactive to the evolution of the American economy : it lowered its rates to stop the stock market downward trend, due to the now infamous subprimes. So why does the ECB does not act the same way? Some say it is because of certain Treaty provisions. Not very convincing. 

The main problem stems from the fact  that monetary and budgetary  policies are closely linked to one another. To decide on its interest rates, a central bank must have a clear view on the government's budget expenditures.  Is it going to increse its deficit, its policies high inflation policies? Or will it reduce its debt? In the United States with a large federal budget, it is possible to get a clear picture. In Europe, for now it is impossible. 

With 15 different budgets for the Eurozone and little if at all of a common one, it is very difficult for the ECB to plan ahead. Still, the Stability and Growth Pact had been designed to  help control the European states budget expenditures!  Very well!  But many European countries, first of which Germany and France, were quick to violate  the self-imposed thresholds. And as a result, today the ECB cannot count on the states to soundly manage the European economy. So its only option really, is to take a look at the few indicators it can safely rely on i. e. inflation and because of that sticking to conservative policies, watching inflation more than growth . Hence a strong euro and the rest of it...

The issue in Europe is that we do only half the job, kind of. The stronger states, that are the fist ones to ask for a political Europe, block the only reform that is really needed: the creation of a European economic government. The means already exist within the Europgroup and  the meeting of the state budget commissioners of the Eurozone. We only need to give ourselves laws that are really binding. Then maybe, we can start to manage the economy of Europe as a whole. 

Of course, politicians wouldn't  be able to make extravagant electoral promises anymore so.... it wont' happen... Too bad...