Wednesday, May 25, 2011

ECB Versus Europe’s Politicians

by Alen Mattich

Wall Street Journal

May 25, 2011

A war is brewing between the euro zone’s fiscal and monetary authorities.

Both are committed to the single currency’s survival, but their approaches are moving in diametrically opposite directions.

The European Central Bank is concerned about the euro’s long-run credibility as a currency. To that end, it is taking a hard line against inflation and any sign of fiscal irresponsibility that might put the currency at risk of disastrous inflation sometime in the future.

ECB member Juergen Stark warned on Wednesday that there was a need to remove fiscal and monetary accommodation because of the underlying momentum of the euro-zone economy. Of course, he was referring to the German economy, where inflationary pressures are building, rather than the peripheral euro-zone countries, where the underlying force remains deflationary.

However, because the euro zone’s core is much bigger than the periphery, policy has to be steered by those lights. This confirms ECB member Lorenzo Bini Smaghi’s comments on Tuesday that the central bank would do “whatever is needed” to keep inflation on target.

But this runs right into the problems the euro zone’s politicians are facing with keeping the Greek economy afloat. Raising rates now makes it that much less likely that Greece—and Portugal and Ireland—will manage to grow their way out of their debt burdens.

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