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Thursday, July 03, 2008

Europe Raises Rates

The European Central Bank (ECB) risked excarbating a European recession by raising European interest rates yesterday by 0.25% to 4.25% (a rate not seen since September 2001).

Jean-Claude Trichet, the ECB's President, fears inflation more than recession and warned that eurozone inflation could "explode" without decisive action.

Taking "decisive" action may well avert inflation. However, it does nothing for the underlying systemic weakness of the European economy and structure. The unified currency and bank, with its "one policy fits all" approach, is not working. Southern European economies (eg Spain, Greece, Italy etc) are facing a bleak recession, exacerbated by rising interest rates. Indeed, services sector activity stagnated across most eurozone countries last month.

Despite the recession the ECB may well increase rates further in the coming months. It will, if it is not careful, end up being the architect of the destruction of the European experiment.

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