Is the ECB Awake?


In recent months the Euro Zone economy has shown signs of slowing. Industrial production has been falling in most of EU countries and inflation is reaching all times high. A strong Euro compounds all the problems and makes the situation even worst.

So far, the European Central Bank hasn’t done anything to prevent a further slowdown. In fact, by focusing solely on inflation the ECB is letting the exchange rate grow, what makes the situation even more delicate for EU exporters. Moreover, the ECB maybe already late to avoid a sharp contraction of the EU economy since is also doubtful that an interest rate cut could help to stabilize the European credit markets. For example, the US Federal Reserve has cut short term interest rates by 225 basis points since last August. Yet, long term borrowing costs in U.S. have actually increased because of the lack of liquidity in the short term money markets.

Only few days ago ECB President Jean- Claude Trichet has finally acknowledged the problem of strong Euro. But the experience shows that his ability to influence the exchange rate is limited. However, the main factor behind the strong Euro has been a very fragile U.S. dollar. In fact, Fed interest rate reductions have contributed to the euro's appreciation and the ECB has been a pure spectator.


Anna Fedec, analyst@tradingeconomics.com
3/11/2008 7:51:11 PM