| Wim's Not Dim |
9 June 2003
|
European Central Bank Finally Cuts Rates
As the Eurozone edged closer to a destructive deflationary spiral, the European Central Bank opted to use 50 basis points in its ammunition belt and dropped interest rates to 2%. This is the lowest level seen in Germany since 1870 when records began. However, elsewhere in Europe, things aren't quite so bad -- Sweden and Britain, which are outside the Eurozone, have kept their rates stable. In retrospect, staying out of the Euro was a wise move.
As the experience of the East and West German Anschluss showed, joining currencies together is easy, but getting them together at the right rate is hard. Harder still is getting two economies to merger. Europe, despite having a single currency, is still made up of national markets (albeit quite open ones), and voting to declare it a Single Market won't make it so. Years of trade lie ahead to erode the current structure.
ECB Chairman Wim Duisenburg was a bit dishonest when he pointed out that separate inflation figures for California and New Hampshire aren't published in the US and therefore argued that German deflation shouldn't be compared with inflation elsewhere in the Eurozone. The fact is that policy in Europe is still decided according to national matters of interest. California and New Hampshire don'thave identities that are quite so distinct.
Meanwhile, Britain and Sweden have retained their sovereignty in currency matters and retain the ability to go their own way. The mistake made in the 1990s was the belief that Germany's stable currency and flat prices could be exported to the rest of Europe. Now, the Europeans are facing the prospect of German deflation and the evils it carries being exported to their states. On the other hand, now that there is a monetary union, Europe can't afford a sick Germany, and if the price of that is inflation on the periphery, that's a bargain.