Jun 9
European Central Bank Doing a Good Job
What? An ardent Eurosceptic like me praising the managers of the Euro?
Well, yes.
We must distinguish between the idea of the Euro as a political project (bad idea) and the way the European Central Bank (ECB) has managed the challenging job it has been given.
The ECB, led by Jean-Claude Trichet has been doing a better job of running monetary policy than the Bank of England.
This is all the more astonishing given that having a single currency shared by many of the countries of the EU is a really bad idea.
The record speaks for itself. Having taken on the task of managing European interest rates with its single aim to control inflation, the ECB has shown itself to be very independent. Perhaps because it covers many countries and is not therefore at the beck and call of a single set of politicians, the ECB has steered a course which has led to low inflation in the Euro zone and this week’s rise in interest rates shows the ECB is not afraid of taking unpopular decisions to keep inflation down.
The reason the ECB has been more successful than the Bank of England lies in the way they decide on how to set interest rates.
The Bank of England’s (BoE) Monetary Policy Committee takes into account a wide range of indicators to decide on the likely inflation outcome and sets interest rates accordingly. The trouble with this approach is that people often latch onto the factors that support their particular point of view and ignore those that contradict it. The BoE then takes a majority vote on what to do with interest rates. The result is a typical British compromise.
The problem is that the context in which the BoE has to work is one in which the British Establishment tries to maintain a narrative that the Thatcher Government was a bad thing and ideas like Monetarism have been discredited.
The BoE has long been ignoring the very high rate of money supply growth and keeping interest rates a bit lower than they should be. Maybe they are afraid of being accused of reviving Thatcherism. This has led to increased inflation and may need a large further increase in interest rates to tackle it. The ECB, heavily influenced by the earlier German management of the Deutschmark, has always placed great weight on the money supply as a forward indicator of inflation. Perhaps it is because, stretched over many countries with vastly different economies, they have little else in terms of consistent indicators that they can call on. This is why the ECB has been more successful. Until the British establishment get over their urge to try to discredit everything Margaret Thatcher did, they will continue to make such errors of judgement and we will all be poorer as a result.
As you may or may not already be aware, members of the Watcher’s Council hold a vote every week on what they consider to be the most link-worthy pieces of writing around… per the Watcher’s instructions, I am submitting one of my own posts for consideration in the upcoming nominations process.
Here is the most recent winning council post, here is the most recent winning non-council post, here is the list of results for the latest vote, and here is the initial posting of all the nominees that were voted on.
