Thursday, June 07, 2007

Stresses and strains

As we remarked earlier, thank goodness we have someone to keep an eye on the serious stuff, in this case the growing stresses within the eurozone, as the different economies continue to diverge.

As always, Ambrose Evans-Pritchard is on the case, describing how the European Central Bank has raised interest rates a quarter point to four percent "amid ever louder grumbling in France over the strength of the euro and a bare-knuckle fight between north and south over the pace of tightening."

Centre stage is ECB bank president Jean-Claude Trichet (pictured), who is blandly reassuring everyone (in public at least) that monetary policy was "still on the accommodative side", but refusing to give any detail on future moves.

The main fault line is the interest rate, which has doubled since December 2005, which Ambrose tells us is a key factor driving the euro to record highs. And, while a resurgent Germany can take the strain, most of the "Club Med" bloc is losing export share - including France.

This is behind the bellicose statements from Sarkozy, backed by Prodi, who want more political control over the euro, purportedly to counter "currency manipulation" by Asian powers.

Interestingly, Ambrose cites Simon Derrick, a strategist at the Bank of New York. Derrick says the moves go beyond political rhetoric. "Sarkozy and Prodi are not going to let go of this. There's a groundswell of feeling that Europe is being taken for a ride by the rest of the world, and they're not going to put up with it any more," he says.

Demonstrating how the parties are shaping up for a battle, Stephen Lewis, a strategist at Insinger de Beaufort, is also brought into comment. He says that the Bank of France is looking for arguments to temper rising rates going forward. And, in a chilling phrase – for those who understand community rhetoric – he adds, "We're nearing the limits of consensus." Now that really is serious.

Needless to say, Trichet insists that there are "no divisions" on the ECB's governing council. But then he would, wouldn't he – even though, as Ambrose points out, the real divisions are growing by the day. In France, there has been a collapse of competitiveness, with the loss of 20 percent of the export market in six years. Meanwhile, Germany has slashed its budget deficit to 0.6 percent of GDP.

The word "unsustainable" comes to mind.


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