Europe will recover and the dunce will be head boy

The ECB may yet have the last laugh. Green-span's a god and Duisenberg's a dunce. Strip away the verbiage, and this characterisation of the respective heads of the American and European central banks is commonly held out as an explanation of the euro's weakness.

While this may be unfair on Wim Duisenberg and his colleagues, it's become a self-fulfilling assessment. The more the euro falls, the more the ECB's credibility suffers and the more reasons the markets find to sell the euro. But fortunately for Mr Duisenberg, the assessment may ultimately prove to be self-correcting. The euro's slide is unleashing economic forces that will eventually put that fall into reverse.

It is easy to understand why Alan Greenspan gets a much better press. Under him, the US economy has enjoyed strong growth, without the inflationary excesses of the past. He has dealt adroitly with several financial market crises.

But for most Americans, Mr Greenspan is credited above all else with making them rich. His tenure has coincided with an unprecedented stock-market boom. Yet while he may be a great man, he is not a god. He's had the good fortune of being in the right place at the right time. He's been helped by the fact that the US public strongly supported the goals of low inflation and reducing government borrowing.

And, for the last five years or so, the US economy has benefited from a remarkable acceleration in technical progress. Its rapid prod- uc

tivity growth, rather than the Federal Reserve, has allowed the New Economy to grow rapidly without inflation. Mr Greenspan deserves credit mainly for not getting in the way by raising interest rates too aggressively.

It would be tough for any central banker to compete with Mr Greenspan's record. But this does not fully explain the criticism hurled at Mr Duisenberg. Part of his problem is that the ECB has been running policy for the eurozone for only a year and a half, and has to earn respect.

But it has to be said that there are many EMU-sceptics in the markets and media looking for the ECB to fail. It is criticised by some for being too secretive. Yet when it does make public comments, subtle differences are portrayed as major policy disputes. By contrast, the Fed is rarely criticised for the lively public debate among its governors. Aside from its track record, this partly reflects the perception that Mr Greenspan dominates the Fed.

Mr Duisenberg, sadly, does not carry such clout. The media, used to Mr Greenspan's delphic musings, have had a hard time with Mr Duisenberg's sometimes quirky sense of humour. He has developed an unfortunate reputation for being accident prone. Yet what has the ECB done wrong? It has not wavered from the strategy - low inflation - it inherited largely from Germany's renowned Bundesbank. It never saw its job as targeting the exchange rate.

On its own terms, the ECB has hardly done badly so far. Though inflation moved up to 2.1 per cent in March - up from 0.8 per cent last January - this is largely due to sharply higher oil prices, that have since fallen back. And it compares well with the US, where headline inflation has risen from 1.8 per cent to 3.7 per cent over the same time.

But, sadly for the ECB, it is being judged against the exchange rate. Yet, not only is not trying to control the rate, it doesn't believe it could. The underlying cause of the euro's weakness is that America's New Economy has put euroland in the shade, drawing in investment.

But it cannot be denied that the ECB's supposed credibility problem has had a tangible effect. In financial markets, perception is everything: a currency's value, like any financial asset, depends on investors' views of the future. So the fact that they think ECB policy is incoherent is bound to have depressed sentiment. As the euro's fall is seen as denting the ECB's credibility, a vicious circle has developed.

But the euro's decline won't continue forever. Indeed, it may ultimately become self-correcting. In the US, Mr Greenspan could become a victim of his own success. He somehow has to cool the super-hot US economy without triggering a dramatic crash. So far, his gradualist strategy of raising rates a quarter point at a time has singularly failed: growth has continued to accelerate. The markets remain hopeful he can engineer a "soft landing", but the risk of a crash, taking the dollar with it, is surely rising.

Meanwhile, back on the Old Continent, euroland's economy is gradually stirring, pumped up by the weak euro. Exports are now growing at 20 per cent plus a year.

Of course, time horizons in the financial markets these days are such that they tend to overlook the impact of exchange rate changes on trade flows that come through, not at "internet speed", but over months and years. But every day the euro falls, the bigger the stimulus to euroland's economy. At some point the markets will wake up to this, and the euro - and with it the ECB's reputation - could begin a revival as remarkable as its decline.

* Mark Cliffe is chief economist at ING Barings.

Start your day with The Independent, sign up for daily news emails
Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'