Squeeze that will help us, but not Europe

As the day gets closer when the European Central Bank takes over monetary policy in Europe, Europe's leading central banks are preparing the ground to ensure they get the level of interest rates needed to keep inflation in check and safeguard the stability of the new single currency.

And, as this column suggested last month, that Europe-wide interest rate is going to be higher than some countries, including Germany and France, currently enjoy. This will squeeze monetary conditions at a time when European economic growth is still struggling to get out of first gear, and probably ensure that economic and monetary union do little to salve the crippling unemployment levels seen across the continent.

The Bank of England found itself in the unusual position last week of being one of the few European central banks to post a "no change" notice on its interest rates, as Germany's Bundesbank led a round of surprise interest-rate increases across Europe.

The rise in the German repurchase rate to 3.3 per cent from 3 per cent - the first rate increase in that country for five years, and the first time its rates have moved at all for more than a year - came sooner than many investors expected and sparked parallel moves in France, Austria, Belgium, Denmark and the Netherlands.

The French central bank described the moves as "part of a movement of measured increases of intervention rates by several central banks belonging to the core group of the European exchange rate mechanism". In other words, the key EMU players are already working together to set monetary policy for the European region as a whole, rather than defining interest rates that suit the needs of their domestic economies.

Neither Germany nor France need higher rates. More to the point, nor do their legions of unemployed workers. The French jobless rolls increased by 19,600 in August. Its jobless rate has been stuck at 12.5 per cent for 11 of the past 12 months. Annual inflation, however, is just 1.5 per cent.

In Germany almost 4.5 million people are out of work, a post-war record that has saddled the economy with an unemployment rate of 11.7 per cent. Unemployment in the UK, in contrast, is currently 5.3 per cent. Britain hasn't had double-digit unemployment since November 1993, and has seen the rate either fall or stay flat every month since January 1994.

The Bundesbank, however, has its collective mind on weightier matters than the German economy. "This was a tightening of interest rates for European purposes, and not for the German economic situation," said Nick Parsons, the currency strategist at Paribas Capital Markets. "It's a watershed in European relations."

As this column said in September, if the euro is introduced as planned in 1999, countries adopting the single currency will have the same official interest rate, set by the European Central Bank. Somehow, the gaps between existing central bank rates of 5.25 per cent in Spain, and 6.25 per cent in Italy, have to be dissolved.

The one-month rate for the present European currency unit is about 4.3 per cent. That indicates that central bank rates in the core European countries look set to rise by about a further percentage point. "Economic fundamentals are irrelevant to the rate debate," said Sonja Gibbs, an economist at Nomura International. "Rates are going up - and fast."

Traders and analysts had already been on interest-rate alert after the Federal Reserve chairman Alan Greenspan said that job growth in the United States has not slowed enough to prevent inflation accelerating. He also said that the world's largest economy was on an "unsustainable track".

Mr Greenspan's warnings revived concern that the Fed may raise interest rates by the end of the year. Europe's central banks, however, are mostly concerned with where monetary policy in Europe needs to be to ensure that the introduction of the euro goes ahead smoothly in 1999. While Mr Greenspan's comments may have hastened the Bundesbank's decision to move on rates, they probably didn't prompt it.

Last week's European interest rate increases have broken the general decline in borrowing costs prompted by the collapse in 1992 of central bank efforts to keep currencies in the European exchange rate mechanism locked within a tight range.

The shift to higher borrowing costs for European companies, apart from hobbling their investment plans, could also crush them on the currency side. Traders suspect that European central banks were intervening in the currency markets on Friday, trying to stem the fall in the US dollar prompted by the German rate increase.

Officials at the central banks of Germany, Belgium, Italy and Austria all declined to comment on this, although with higher exports looking like the only potential engine for European growth, it would make sense for them to try to prevent a weaker dollar making European exports more expensive, eroding the value of earnings European companies make from sales in the US.

While European Commission forecasts show that the total economy of the 15-nation European Union is likely to expand by 2.4 per cent this year and by 2.8 per cent next year, unemployment in the group's largest economies refuses to budge from double-digit levels.

Last week's rate increases show that the EU's 18 million unemployed will take a back seat to the campaign to put the future single currency on the same solid foundations that turned the deutschmark into Europe's most reliable money in the decades after the Second World War.

All of which could be good news for the UK. Many economists here expect the Bank of England to tighten policy just one more time, pushing base rates up by a quarter point to 7.25 per cent. As Europe sets off on the road to ever-higher interest rates, the UK government is likely to find itself rewarded with further cuts in its borrowing costs as investors pile out of European bonds and into gilts. The gilt market may find itself even more of a safe haven from EMU in the months ahead.

q Additional reporting by James G Neuger and Perri McKinney

News
news

Emergency call 'started off dumb, but got pretty serious'

News
people

Britain First criticised for using actress's memory to draw attention to their 'hate-filled home page'

Arts and Entertainment
JK Rowling is releasing a new Harry Potter story about Dolores Umbridge
arts + entsJK Rowling to publish new story set in wizard's world for Halloween
News
Russell Brand was in typically combative form during his promotional interview with Newsnight's Evan Davis
people

Thought you'd seen it all after the Jeremy Paxman interview?

PROMOTED VIDEO
Arts and Entertainment
On The Apprentice, “serious” left the room many moons ago and yet still we watch
tv

Greatest mystery about the hit BBC1 show is how it continues to be made at all, writes Grace Dent

Life and Style
tech

Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into conflicts
Arts and Entertainment
A scene from David Ayer's 'Fury'
film

"History is violent," says the US Army tank commander Don "Wardaddy" Collier

News
The Edge and his wife, Morleigh Steinberg, at the Academy Awards in 2014
peopleGuitarist faces protests over plan to build mansions in Malibu
Sport
Luis Suarez and Lionel Messi during Barcelona training in August
football

Striker's four-month ban for biting an opponent expires on Friday

News
news
News
ebooksAn unforgettable anthology of contemporary reportage
News
peopleFox presenter gives her less than favourable view of women in politics
News
George Clooney and Amal Alamuddin married in Venice yesterday
peopleAmal and George Clooney 'planning third celebration in England'
Property
One bedroom terraced house for sale, Richmond Avenue, Islington, London N1. On with Winkworths for £275,000.
property
Sport
Erik Lamela celebrates his goal
football

Argentinian scored 'rabona' wonder goal for Tottenham in Europa League – see it here

News
i100
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

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

CTO / Chief Technology Officer

£100 - 125k: Guru Careers: A CTO / Chief Technology Officer is needed to join ...

COO / Chief Operating Officer

Competitive (DOE): Guru Careers: A COO / Chief Operating Officer is needed to ...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker