Decision Time For The ECB

Our old friend Ambrose Evans-Pritchard is out again with another dose of pessimism. Though his articles are taking on a sort of sameness lately, they usually contain something worth thinking about.

This week he thanks the guardian angel that kept the U.K. from surrendering control over its own currency. As he points out the country would really be in deep had it surrendered its independence and adopted the Euro. He likens countries like Spain and Ireland who surrendered control to individuals facing crucifixion.

As for the ECB, it has not reached the starting line. Jean-Claude Trichet insists that there is no danger of deflation in Europe. What is the weather like on his planet, asked Mr Krugman.

The ECB has cut rates to 1.5pc, but since they need to be minus 1pc on the Taylor Rule, this leaves the breach as wide as ever. The Bundesbank is blocking any serious move towards quantitative easing.

Given that Germany’s economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland’s SNB are cash printers these days.

So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.

I’ll take the Old Lady of Threadneedle Street any day, warts and all.

It’s not a given that the ECB won’t come to its senses. It’s also possible that the basket case countries might hang with the Euro though it is hard to imagine that politically a country like Spain can take much more pain and not bolt. What is clear is that the long-term future of the EU at least from an economic standpoint is at a crossroads. I should think that a lot will be decided in the near future.

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