July 31 (Bloomberg) -- The European Central Bank might be run by a Frenchman; its heart and soul belong to Germany's Bundesbank.
ECB President Jean-Claude Trichet faces political pressure to stop raising interest rates, and some of his own policy makers query the extent of the inflation threat in Europe. Still, investors are betting he'll push borrowing costs higher, upholding the legacy of Germany's central bank, which celebrates its 50th anniversary tomorrow.
``Some ECB council members are sounding more cautious about further rate increases, but I'd still bet on the Bundesbank cabal winning the argument,'' said Charanjeev Chana, an economist at Stone & McCarthy Research Associates in London. ``We still expect rates to rise twice more by the end of the year.''
The Bundesbank's inflation-fighting zeal remains at the heart of European monetary policy even after the bank ceded control of rates to the ECB in 1999. German memories of rampant inflation after World War I, and Adolf Hitler's subsequent rise to power, forged the Bundesbank's resolve to achieve stable prices and made it a role model for central banks across Europe.
``The Bundesbank tradition was completely adopted by the ECB,'' said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. ``And Germany is the biggest economy in the euro zone, which tends to give the Bundesbank president more clout on the ECB council.''
`Hyperinflation'
``Hyperinflation'' gripped Germany in the 1920s after the government printed banknotes to finance World War I and fund reparation payments to the Allies after the country's defeat in 1918.
Prices spiraled out of control and confidence in the Weimar Republic, Germany's first full-fledged democratic system, was undermined. By the end of 1923, prices were doubling every 49 hours, and one U.S. dollar was worth more than a trillion German marks.
``Nothing rendered the German people so embittered, so full of hatred, so ready for Hitler, as inflation,'' former Bundesbank and ECB Chief Economist Otmar Issing said in 2004, quoting Austrian writer Stefan Zweig.
To ensure hyperinflation never returned, the government created the Bundesbank on Aug. 1, 1957. It was charged with ``safeguarding'' the stability of the deutsche mark, which had been established in 1948 and became a bedrock of Germany's economic recovery.
De-Facto Anchor
The mark also became the de-facto anchor to which other European currencies were tied after the collapse in 1971 of the Bretton Woods fixed exchange-rate system.
With the introduction of the euro in 1999, ``there had to be a reason for markets to attach credibility to the ECB,'' said James Nixon, an economist at Societe Generale in London. ``The Bundesbank provided one.''
The ECB adopted the principles that earned the Bundesbank respect. Both argue that price stability is the overriding aim of monetary policy, a stance that contrasts with the U.S. Federal Reserve's dual mandate to both fight inflation and foster job creation.
The ECB, like the Bundesbank, also says its decisions should be independent of government interference and take money-supply developments into account.
Doubts Raised
Those principles are now being questioned as the Frankfurt- based ECB prepares to raise rates for the ninth time since late 2005. The ECB's benchmark is already at 4 percent, a six-year high, and inflation has stayed below the bank's 2 percent ceiling for 11 straight months.
Bank of France Governor Christian Noyer has raised doubts about the accuracy of inflation signals sent by money-supply data, while Portugal's Vitor Constancio has said the appreciating euro may curb any inflation threat.
``This may be viewed as part of the ECB detaching itself from the old Bundesbank line, but the fact that Trichet defended the monetary strategy so strongly sent a very powerful message,'' said Thorsten Polleit, an economist at Barclays Capital in Frankfurt.
Trichet used a speech in June to laud the Bundesbank's ``acceptance of the ultimately monetary nature of inflation,'' and said ignoring money growth would entail ``excessive and unreasonable risks.''
French Attack
Trichet and the Bundesbank have also been united in defending the ECB after French President Nicolas Sarkozy called for governments to have a say in monetary policy.
The ECB's independence is enshrined in law and to question it is ``not acceptable,'' Trichet said. Bundesbank President Axel Weber dismissed Sarkozy's comments as ``noise.''
The Bundesbank has also supplied the ECB with a string of so- called hawks. Weber is the toughest inflation fighter on its 19- member governing council, according to a ``hawkometer'' compiled by Stone & McCarthy. He's topped the index in 10 of the past 14 months. ECB Executive Board member Juergen Stark, a former Bundesbank vice president, regularly rates among the top three.
With oil prices rising and the euro-region economy growing at close to the fastest pace since 2000, Weber and Stark are arguing for higher rates.
``Trichet seems to be listening,'' said Chana. ``The ECB acts pre-emptively to prevent inflation, and that's a Bundesbank trait.''
The ECB will raise its key rate to 4.25 percent in September, according to all 13 economists in a Bloomberg News survey. Some expect the bank to signal the move after its policy meeting on Aug. 2.
For now, the ECB remains driven by a doctrine best summed up by former Bundesbank President Karl Otto Poehl.
``Inflation is like toothpaste,'' he said in 1980. ``Once it's out, it's difficult to get back in again. So the best thing is not to squeeze too hard on the tube.''
No comments:
Post a Comment