Wed, Jul 20, 2005 - Page 9 News List

European Central Bank acts as anchor for a continent in crisis

Europeans can bet on it that the ECB will not let the euro be ravaged by inflation because their leaders, having failed to do their jobs, now fear they might lose them

By Melvyn Krauss

The European Central Bank (ECB) is making its reputation at this time of turmoil and crisis. Barely a month after the rejection of the EU constitution in France and the Netherlands, the EU summit in Brussels ended in a surprisingly acrimonious orgy of national egoisms and no deal. Then the terrorists struck in London. With all this trouble, the ECB is showing itself to be an "anchor of stability" by steadfastly sticking to its mandate of insuring price stability.

Europe suffers from a profound crisis of confidence. Its economy, for example, cannot recover properly because consumers, lacking confidence in the ability of their political leaders to solve the economy's manifold economic problems (budget deficits and pensions, among others), are saving for a rainy day they feel is just around the corner -- and businessmen are reluctant to invest, because they don't trust governments to make the necessary economic reforms.

The public's lack of confidence in the EU's political leadership is totally justified. Instead of actually doing something constructive about Europe's essential problem -- reforming expensive welfare states to ensure global competitiveness -- Europe's political leaders are hiding behind straw-man arguments about "ultra-liberal Anglo-Saxon models," and pressuring the ECB to lower interest rates as if European economic weakness were Frankfurt's fault.

Europe's finance ministers portray the ECB as closed to dialogue. When testifying before the EU parliament's economic and monetary affairs committee, Luxembourg prime minister and Euro-group chairman Jean-Claude Juncker said there should be "open and frank" talks between the euro-group ministers and the ECB -- and French finance minister Dominique de Villepin said the same thing.

According to a knowledgeable ECB source, however, Europe's finance ministers regularly meet in secret with the ECB leadership for a mutual and frank exchange of views on monetary policy and other issues. The dialogue already exists though the public does not know it. Such disingenuousness does little to boost confidence in Europe's political leadership.

The ECB has done all it can for growth by giving Europe a prolonged period of monetary stability at record-low interest rates. Does anyone really believe consumers are holding back on spending -- and businessmen postponing their investments -- in anticipation of that next drop in interest rates? To paraphrase Keynes, you can lead a horse to water but you can't make him drink.

"The last thing Europe needs now is an interest-rate cut," says one influential member of the ECB Governing Council in a candid assessment of the current situation. Capitulating to outside political pressure is no one's definition of an "anchor of stability." The euro would collapse, and the ECB finished as a creditable central bank.

Moreover, ECB chief economist Otmar Issing predicts long-term interest rates would go up -- not down -- as inflationary expectations increased. So cutting interest rates would not only be stupid -- it would be crazy.

But the ECB is not going to cut rates even though, for public-relations reasons of keeping the political wolves at bay, it deceptively hints it might. Don't be fooled by such feints. The ECB is holding fast and, in doing so, demonstrates to Europe's peoples that there is at least one EU institution they can trust.

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