Eurozone Inflation Stays at a Record 3.1% - ECB Has No Room For a Cut

Saturday, January 05, 2008

Who wants to be in the shoes of the governing council of the European Central Bank (ECB) next Thursday? 
Despite all statistical tricks Eurozone inflation remained unchanged at a record 3.1% last December, overshooting the ECB's target of 2% by a horrific 55%. As blogged yesterday money supply M3 growth remained at a record 12.3% for the second consecutive month too. This is almost 3 times more than the target rate of 4.5% M3 growth. (You win a free subscription to The Prudent Investor if you can find this reference value on the ECB's website in less than 5 minutes.)
If the ECB would really stick to its mandate of fighting inflation (which central banks with their unbacked fiat currencies create in the first place) it would come to no other conclusion than to raise its reference rate, currently standing at 4%. 
Also take note that the deposit facility of the ECB pays a negative real interest rate at currently 3%. But I don't think European banks would have much to deposit anyway as it appears that Europe will drown in a sea of debt in 2008. Investors here have been good buyers of property related US debt, relying on wrong AAA ratings and enjoying a moderate yield pickup compared to sovereign debt. It will cost them their corporate life. 
But don't worry too much. It will be as in all financial cycles: In good times private shareholders cash in dividends and when it goes bankrupt the bucket gets passed on to the taxpayer via nationalization. Banks have always been a specially protected industry.
While the ECB's inner workings are hidden from the public - no minutes of the meetings are published - we can nevertheless expect raised voices next Thursday. Cyprus, a Euro member for only the fourth day, has already expressed its opinion that the thinking should rather circle around a rate hike.
The ECB faces a dilemma, though. If it raises rates it risks further unwelcome speculative inflows and would also accelerate the drop of Federal Reserve Notes (FRN.)
European politicians hope for a rate cut in order to stimulate the declining economies in the Eurozone, with only competitive Germany shining as a better example.
But hey, the structural problems we face in Europe cannot be cured by creating more worthless debt=credit=fiat money.
From a global perspective Europe's relevance will decline rapidly. After all, Europe has
  1. almost no commodity or energy resources
  2. the highest labour costs in the world, and
  3. a rapidly aging population.
So think again before you consider the Euro as a safe haven. It will not be.


Wikinvest Wire