The Euro Area's political constraints

By: Wolfgang Münchau

Not all policy solutions are possible in a monetary union. There are severely constitutional constraints.

Why the European Debate on Competitiveness is going nowhere

Raising competitiveness has been the prime goal of economic policy in Europe. But is it a sensible goal? Those who favour a competitiveness-based approach often make false analogies between enterprises and countries. Countries do not compete in the way companies do. Trade among countries is not about profit but about the division of labour. It can benefit all by raising productivity. A more meaningful concept of competitiveness at the national level defines a competitive country as one that can maintain high rates of growth and employment in the medium term. This concept focuses on the country’s ability to provide its citizens with high and rising standards of living in the medium and long...

A crisis for those whose first language is English

Like it or not, the credit crunch is an asymmetric crisis. There will be no decoupling, but it will not affect everybody as badly as it will affect the US. That includes the euro area, which benefits from some important stabilisers.

The case for a rise in European interest rates

European Interest rates will probably remain on hold. But we believe that they should be raised moderately.

What to make of Axel Weber's comments on inflation?

Axel Weber and Jurgen Stark are both warning about higher inflation, and say explicitly that interest rates may well rise. This would have very serious conseqences for the euro. We stick with our view that interest rates are likely to remain at 4%, but acknowledge now that there is a non-trivial risk of a rate increase ahead.

What to make of the ECB's hawks

Stark and Weber have both signalled that the interest rates may go up. We believe that in particular Weber's hawkish comments on inflation are addressed at German wage setters, and are not indicative of the ECB's current mindset. We also believe that the ECB may be underestimating the economic impact of the credit crisis. We stick with our view that interest rates have peaked at 4%.

How worried is the ECB about inflation?

We believe that the ECB does not like to admit in public that a inflation threat can suddenly evaporate while policy remains unaltered. But this does not change the basic fact that we are heading towards weaker growth and lower interest rates.