Outlook: Euro weakness

YOU WOULD think that by now Oskar Lafontaine and his deputy at the German finance ministry, Heiner Flassbeck, might have learned their lesson. Everytime they open their mouths to berate the European Central Bank for not cutting interest rates fast enough, it only makes all those independently thinking central bankers more determined than ever not to follow their advice.

This is becoming an ever more silly and damaging game of who blinks first. We cannot be seen to do what the politicians tell us, the ECB seems to say, as that would damage our credibility. So we can't cut rates, even if we thought there might be a case for it. So silly has the process become that Mr Flassbeck might be more likely to achieve his desired aim if he were to demand a rate increase than by speaking his mind.

Meanwhile, the euro seems to have been born a sickly infant. As yet it is unclear whether this is more to do with the weakness of the German and French economies than the likely counter cyclical direction of European and American interest rates. The ECB claims to have no exchange rate target, or indeed to take the exchange rate into account at all in making its interest rate decisions. But plainly currency weakness has become as good an excuse as any for not cutting rates.

Politicians are a devious lot, and there is certainly a degree of "blame management" in whatever Mr Lafontaine has to say about the ECB. By blaming the ECB, he can to some extent deflect attention from his own policy mistakes. By the same token, it makes good sense politically to make the ECB a scapegoat for the euro's wider problems. If the euro is a disaster, it won't be the politicians who invented it who are to blame, but the ECB. Even so, it can reasonably be assumed that Mssrs Lafontaine and Flassbeck do genuinely want interest rate cuts.

So how can the ECB be persuaded to do its duty? One possibility is that politicians have chose too simplistic a target. A big problem with the ECB as presently constituted is that it has no proper inflation target. The main instrument for determining policy is monetary targeting, commensurate with the general target of keeping inflation below 2 per cent. There is little guidance as to what this means, though it is generally assumed the ECB wouldn't pursue price deflation as a policy objective. Even so, the assumed range of 0 to 2 per cent creates a ready zone of inactivity, and potential for exactly the sort of paralysis the ECB now seems to be suffering from.

By contrast, the Bank of England's inflation target is a symmetrical one. It is as much of an offense to overshoot on the downside as on the upside. This seems such an eminently sensible approach to reconciling the policy aim of full employment with that of low inflation that it is amazing our European part

ners haven't yet seen fit to copy it.

Start your day with The Independent, sign up for daily news emails
News
Courtney Love has admitted using heroin while pregnant with Frances Bean Cobain, her daughter with Kurt Cobain
people
Sport
Murray celebrates reaching the final
tennis
Arts and Entertainment
'The Archers' has an audience of about five million
radioA growing number of listeners are voicing their discontent; so loudly that even the BBC's director-general seems worried
News
i100
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker
Why the league system no longer measures up

League system no longer measures up

Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
Valentine's Day cards: 5 best online card shops

Don't leave it to the petrol station: The best online card shops for Valentine's Day

Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

Devil in blue Costa is a reminder of what Liverpool have lost

The Reds are desperately missing Luis Suarez, says Ian Herbert
Ashley Giles: 'I'll watch England – but not as a fan'

Ashley Giles: 'I'll watch England – but not as a fan'

Former one-day coach says he will ‘observe’ their World Cup games – but ‘won’t be jumping up and down’
Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness