<<Europe’s Coming Crisis
0010 GMT, 000823
The European Central Bank, which controls Europe’s monetary policy, will soon raise interest rates, not to counter rising European inflation, but instead to counter rising German inflation. European inflation topped 2.4 percent in July – well over the 2.0 percent ceiling established in the 1992 Maastricht Treaty. However, it was just this month that German inflation hit the 2.0 percent mark. While this may be prudent policy now, it will cause significant tensions across a growing union as Europe’s periphery becomes numerically larger and politically more powerful.
According to the Maastricht Treaty, when Europe’s inflation rate breaches the 2 percent barrier, the ECB should raise interest rates to make credit more expensive. Tightening credit puts the brakes on economic growth, which in turn brings inflation under control.
But Europe’s overall inflation broke the 2 percent barrier in June, not July, and the ECB declined to raise rates. That’s because Germany, out of economic necessity, ignored Economic and Monetary Union (EMU) requirements.
The more developed core economies of France, Germany and the Low Countries grow more slowly than the smaller, poorer countries of Europe’s periphery, such as Ireland, Portugal and Spain. Consequently, the poorer economies need lower interest rates, which provide cheaper capital needed to grow.>>
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