Of course, the unexpectedly sharp slump in the United States has contributed significantly to Europe's downturn. The ECB finally cut its key interest rate by a quarter point to 4.5 percent 10 days ago. More steps are likely to follow within the next six months. Coming economic news will probably be rather weak. The real issue now is how far the ECB should go.
Many pundits call for more rate cuts until a new upswing has clearly started.
But as rate moves work only with a lag, such a policy would lead a bank to cut rates for too long and by too much in the meantime. A look at present economic data thus does not suffice to steer monetary policy. An old rule suggests neutral money market rates should reflect inflation and growth trends of an economy. Adjusted for short-term distortions, prices in the euro zone are rising at 1.5 percent. Unlike the United States, Europe does not suffer from an investment and consumption bust after an excessive boom.