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Flat-Earth European Central Bank misreads oil spike again, and kicks Spain in the teeth
Date 07/03/2011 11:36  Author webmaster  Hits 963  Language Global
07 MAR 2011

The European Central Bank has once again risen to the bait. Faced with an oil supply shock that deflates incomes, it plans to tighten the vice yet further with a knee-jerk rate rise in April.

By Ambrose Evans-Pritchard | The Telegraph

The demarche is reckless, politically-motivated, and risks causing yet another spasm of the EMU debt crisis. If recovery proves to be more fragile than it looks – vulnerable to a fiscal squeeze in the West and a credit squeeze in the East – this ECB error will have global ramifications.

The ECB's governors might usefully study Systematic Monetary Policy and the Effects of Oil Price Shocks, a seminal work in 1997 by a Professor Ben Bernanke of Princeton.

The reason why such shocks often lead to slumps is because policymakers make a hash of it. "The majority of the impact of an oil price shock on the real economy is attributable to the central bank’s response, not the inflationary pressures engendered by the shock,” wrote Bernanke.

No doubt ECB governors need to prove their hawkishness after Bundesbank chief Axel Weber walked out of the Eurotower in disgust, more or less stating that he did not wish to take over a body that had departed so far from orthodoxy, and succumbed to political pressure by purchasing the bonds of bankrupt states.

They are right to be worried. The euro lives or dies on German sufferance. The unwritten contract of Maastricht is that EMU must be run on German terms, with a German veto over monetary policy. This contract is being tested.

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