The European Central Bank must be trying to break the record. The eurozone is plunging into a recession of unknown duration and depth, and yet the ECB has just raised interest rates. It says that it will not be cutting them until inflation is under control. In fact, says the FT journalist talking in this interview, the ECB are quite pleased to see a recession as it will help to crush euro-inflation.
This is extraordinary. While growth roared and credit expanded, and inflation across the eurozone has been at least double the official rate (ask anyone who lives there or holidays there) interest rates were kept low at around 2-3%. Now the eurozone has crashed into a long expected recession and credit crunch threatening the survival of banks and businesses alike, the ECB has raised interest rates, and says it will be keeping them higher.
I’ve heard of the phrase ‘countercyclical investment’. This is the opposite. ‘Cycle-reinforcing’ economic management. No wonder the dollar is surging where the government has cut interest rates as far as it dared to help the ailing US banking system to survive, and where people are buying the bargain-basement deals on offer.
Once the story of the credit crunch gets to be told, it will primarily be a European narrative. And not only an economic one. The coming Eurocrash will bring the end of euro-optimism and eurobelief, and maybe the end of the euro too. Prices are tumbling in Europe across a range of assets – shares, property and (this month) commodities – but who will be aggressively buying to bring the downwave to an end? Not many with interest rates at 4%, I’m afraid.
If I was Irish and had just seen my NO vote against Lisbon being ignored by the EU, and was now being expected to face high interest rates during a recession after low interest rates during a boom, I would be seriously thinking of getting out of the EU and re-establishing national common sense economic management…not just quitting the euro, but the EU.
The same could be said for Italy, Spain , Greece and others that desperately need lower interest rates to stop a crash from dragging them yet further down the plughole.
In the UK, the problem as John Redwood so capably points out in his blog John Redwood’s Diary is that government spending is out of control. The government should be cutting interest rates here too, but cannot as its borrowing is ballooning into the stratosphere with no sign of it stopping. The downturn will be far nastier as a result.
Please listen to a Gordon Brown speech from the 1990s promising ‘no more Tory boom and bust’ – and then cry for the idiots who believed him and voted for him no less than three times. See here No More Boom And Bust – An Epitaph For Gordon Brown. He’s like an ocean liner locked on an unstoppable course with engine on maximum revs while the iceberg approaches.
He began as Stalin, then became Mr Bean. Now along with his euro-buddies, he has undoubtedly become The Titanic.