The Fed cut rates earlier this week, but the ECB, the EU’s new central bank, failed to follow suit. This is bad news – for Germany in particular. A report in a recent edition of The Economist gives some background:
“Back-of-the-envelope calculations suggest that, if the old Bundesbank were setting interest rates to suit Germany alone, they would now would be below 2% [the ECB’s benchmark rate is currently 3.25%]. Worse still, not only is Germany unable to cut interest rates, but the EU’s stability and growth pact [recently denounced, in a rare moment of honesty, by EU president Prodi as “stupid”] also obstructs any fiscal easing. nor can it devalue its currency. Stripped of all its macroeconomic policy weapons, Germany now runs a serious risk of following Japan into deflation.”
A ‘one size fits all’ currency simply does not work. I wonder if Tony Blair could explain again exactly why it is that he wants Britain to join the Euro.