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Europe's bank not reading the tea leaves

David Frum

TEXT OF COMMENTARY

KAI RYSSDAL: You've got to say this about American investors: They're truly eternal optimists.

Take the latest example of the current zeitgeist on Wall Street -- that last month's sharp drop in durable goods orders we learned about this morning will prompt Mr. Bernanke and the gang at the Federal Reserve to cut interest rates again, sometime soon.

The cost of money is moving in the opposite direction in Europe. The European Central Bank has bumped its rates eight times since 2000, and there are no signs it'll change course when it meets next week.

Commentator David Frum says that'd be bad for Europe -- and bad for us.


DAVID FRUM: European central bankers are paid to worry about inflation, and there is no doubt that in Europe they have plenty to worry about.

Housing prices have zoomed across the Euro zone since 2000. Household debt has boomed in countries like Britain, Denmark and Spain to exceed 100 percent of GDP.

But European bankers aren't reading the tea leaves. In Europe, as in America, the housing boom is ending. Euro-zone economies grew by 2.4 percent in 2006 -- an improvement over the late 1990s -- but still anemic for economies struggling with chronic underemployment. You'd think the ECB would cut rates.

But no -- defending a strong Euro matters more than jobs, growth and household balance sheets.

They want the Euro to rival the dollar's prestige and fill foreign reserve coffers. A pity, because the Euro's pell-mell rise could distort the whole world economy.

To prop up the dollar, U.S. central bankers may be pushed to increase interest rates, just when worried U.S. markets could most use a rate cut. That would hurt U.S., and so global, growth.

A European rate cut now would relieve the pressure on the dollar, freeing the Fed to cut U.S. interest rates more.

A rate cut in Europe would also stimulate economic growth there, and increase demand for U.S. exports just when our economy begins to slow.
Since 1945, U.S. monetary authorities have accepted that they bear responsibility not only for the U.S. economy, but for the world.

But does the European Central Bank? One fears the answer is "no."

As the Euro-zone has expanded geographically, it has shrunk mentally. As the bankers' powers have grown, their perspectives have narrowed. As the Euro goes global, its managers have become more parochial.

That's sad for the unemployed of Europe. But it may become a danger to the whole planet.

RYSSDAL: David Frum is a resident scholar at the American Enterprise Institute.

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