. What does the ECB do about rates?
ECB has can't do won't do problem.
Let me try to explain if I can. They need political will of their masters to dismantle this huge 'cradle to grave social security system'. Strong agriculture lobby works for 'common agriculture policy' so as to continues with huge subsidies and keeps free trade products out of the markets.
In Europe in name of egalitarianism 'inefficiency' is bred and encouraged. When remaining jobless and collecting claims becomes more profitable than working, the only way to address this is to cure the underlying ills. ECB options look severely limited, their mandate is to maintain price stability on lines of Bundesbank. The problems is that Bundesbank could pay for huge expenditure by united Germany on East Germany by maintaining high rates from 1989 onwards. The billions of marks spent annually to revival of East Germany could have quite inflationary if it was not followed by very tight monetary policy. The 50 years of East German entrenched ' inefficiency and Mafia culture' under Communists was to be fixed by throwing money at the problem. It did help untie Germany but Europeans due to DEM superiority in the EMU had to also go along unwillingly with the Bundesbank policy of tight money.
The interest rates in France were kept in line with DEM under the policy of 'Francfort'. The need of French economy was although lower interest rates, however still in face of huge unemployment and recession the price of parity of FRF with DEM became the prime objective. EMU and protection of snake was the objective. This was purely a political decision so as to maintain unity and peace in Europe. The French and other European companies realized that the only way to survive would be to become more efficient, they had to be profitable even at 11% interest rates for that they cut waste and increased efficiency. Whereas Germany without realizing the contributions of Europe to its unity bid continued its policies, the structural issues are now even more difficult to address. Subsidized populace becomes use to entitlements and the only way to correct is to be prepared to face the music of social unrest.
UK also tried to keep the sterling with in EMU however failed in 1992, sterling lost 30% of its value against DEM in that famous black September attack on UK currency led by 'Sorros Quantum Fund'. He could see that the policy to maintain sterling parity to 3.00 DEM is impossible to sustain. The economic cycles were divergent between Germany and UK and in wake of UK dismal manufacturing sector performance the last UK needed was higher interest rates and higher sterling parity. As you know Germans undoubtedly in manufacturing are more productive and efficient than UK, at higher exchange parity UK product exports became impossible.
Within few days of forced expulsion from EMU, sterling interest rates dropped from 12% high to 7%, the sterling dropped from 3.00 to 2.20 against mark the forced exodus of sterling brought to light the price paid by Europeans to maintain 'peace' in Europe. Since that de-coupling of UK economy UK has prospered, the ills associated with higher interest rates and deep recession were quickly addressed, UK higher unemployment is now amongst lowest in Europe. The issue was that two economies had structural divergences and strait jacketing them under one monetary policy was wrong.
The problem of political 'German hegemony' is being resolved by economic forced unity. ECB choices are limited. Monetary policy alone is not a guarantor of price stability it is productivity (output divided by employment), the inequality of wages as a result of huge differences in social charges, social cost of maintaining huge subsidies, niche competence of regions. The geographical and cultural divide and immobility of labor in Europe is another issue that ECB cannot function on Fed lines. Germany and Ireland are not like Arkansas and California, and Irish man would have great difficulty in relocating to Germany due to equivalence certification and lack of ability to communicate. Bureaucracy has imposed Europe from top unlike US bills of right or constitution it is not bottom -up effort, top- bottom efforts in my opinion usually fail. In my opinion ECB needs an equivalent of Treasury Secretary and also a congress where the chairman and his policies are grilled by elected representatives, European legislature is not politically equipped with that task and hence the political will be always lacking to tackle the issues from the front.
<<Also, as evidence builds in the USA supporting a rate hike, what will this do to an
already strong dollar? Especially for Hong Kong and Argentina?>>
I will discuss it later.. I have to catch up on few things right now .. regards |
