Wednesday, August 31, 2005

French FM Attacks Euro-Bank's Political Independence

The French Foreign Minister, Philippe Douste-Blazy, has called on the European Central Bank to be more repsonsive to the blandishments of national politicians. The bank's low inflation strategy has kept interest rates low and unchanged for the past 27 months, despite this not being in the interests of some EU countries, Italy especially.

The trouble is that the ECB was explicitly set up to be free from political pressure, and given a mandate to ensure price stability and a strong euro. That this is not always in the interests of the participating countries was patently clear before the euro's introduction, and was one of the main objections to it.

At Germany's instigation, the euro was to be protected by a Stability Pact, to curb free-spending, high-debt countries with an elaborate system of checks and fines. Germany has since been the worst offender against the Pact, today announcing that it will, for the fourth year running, exceed the deficit. As we noted here on January 17th, the Pact is dead, and its passing has undermined the euro's chances of survival.

If the ECB were to bow to the demands of individual countries, the currency would become the plaything of the biggest countries, who would scrap among themselves to set the monetary policy best suited to them. No-one could possibly win from such a change of tack.

The alternative is to abandon the euro and revert to national currencies. Whilst a breakaway is looking increasingly plausible, again in connection with Italy, it would represent a huge loss of face for the EU Commission and its predecessors, and an enormous setback to dreams of ever closer union. But it is high time for a feasibility study into the matter, so that European taxpayers can evaluate for themselves whether it's worth paying the price to correct this premature, crumbling monument to hubristic pan-European government.

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