Data released yesterday showing an unexpected expansion in the money supply confirmed the bank's concerns about inflation risks in the 12 EU countries using the euro currency. Traders blamed the news for sending the euro below 89 cents against the dollar, as whatever faint hopes financial markets may have harbored for quick ECB action were dashed. The euro was trading at 88.79 cents late yesterday in New York. Lower interest rates can spur economic growth by encouraging companies and consumers to borrow and spend. They can also fuel inflation, the ECB's nemesis.
History helps explain the difference.
The ECB was modeled on the German Bundesbank, which became one of the world's most respected central banks by pursuing an unwaveringly hawkish anti-inflation policy. Independence from political pressure was built into the Bundesbank after World War II to ensure that the government would never have a license to print money, one of the causes of the hyperinflation of the 1920s. Americans, on the other hand, remembering the Great Depression, steered the Fed's postwar policy with such laws as the Employment Act of 1946 and the Full Employment and Balanced Growth Act of 1978. There are also different assessments of where things are in Europe and where they should be. While producer confidence has taken a hit in recent months, European consumers are still upbeat, due to employment growth and tax cuts.