Saturday 20 October 2018

Look to Boston, not to Berlin

Look to Boston, not to Berlin THE European Central Bank (ECB) cut interest rates again last week, bringing rates in the eurozone countries to their lowest levels in half a century. The decision comes as Germany, which accounts for one third of the output of the eurozone economies, is facing its worst financial crisis since 1945.

The ECB move illustrates the difficulty the bank faces in setting a single interest rate for national economies with varying growth and inflation levels: the one-size-fits-all monetary policy. The Bank's essential remit is to subdue inflation (keeping it at or below 2 per cent), which it has managed to do. But, unlike its American counterpart, the Federal Reserve, the ECB has no broader mandate to concern itself with other economic issues, like growth rates and unemployment levels. However, with inflation now under control and with a weak dollar resulting in a strong euro at a time of European economic stagnation, clearly the ECB was under pressure to act decisively, by providing some relief.

In cutting rates by half a percentage point, the Bank, temporarily, has eased some of the competitive pressures on European business, with lower interest rates curbing the euro's rise against the dollar. The difficulties involved in setting a common monetary policy for all 12 members of the single currency, are all too readily apparent. The needs of the German economy, for low interest rates and a weaker currency to raise growth, increase exports and jobs are the opposite of those that the Irish economy requires just now.

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