Europe calculates the cost of borrowing

Marketplace Staff Apr 7, 2011
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Europe calculates the cost of borrowing

Marketplace Staff Apr 7, 2011
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JEREMY HOBSON: Now let’s get to today’s interest rate hike by the European Central Bank. The bank is boosting the cost of borrowing by a quarter percent to battle inflation. It’s the first time in 40 years that a major European central bank has raised interest rates before the Federal Reserve.

Diane Swonk is chief economist at Mesirow Financial. She’s with us live as she is every Thursday from Chicago. Good morning.

DIANE SWONK: Good morning.

HOBSON: The European Central Bank wants to battle inflation. But they’ve got similar inflation to what we have right now, which is to say, not very much. Why are the Europeans raising rates when the Fed is keeping rates the same?

SWONK: Well there’s two very simple reasons. The first is that the largest economies in Europe, most notably Germany, are much stronger than they are in the U.S. and much more inflation prone. The second reason is that Europe has to deal with the Euro, and while they’ve had all these debt crisis’s they need to defend the credibility of the European Central Bank which is the only thing that unifies the Eurozone at the moment. Remember, they’re also making these rate hikes and giving hundreds of billions in bailout dollars to the periphery countries like most notably Portugal which asked for funds yesterday, will likely get them this weekend to offset the affect of that rate hike on that country.

HOBSON: To the tune of I think $100 billion. Diane — before I let you go I want to ask you about the possibility of a government shutdown in this country, which could come tomorrow night at midnight. What concerns you most about that possibility?

SWONK: Well not only the direct economic consequences for the U.S. economy of jobs lost and people not being paid, checks not being received in the mail, but more importantly what it sends as a message to the rest of the world of our inability to deal with our own deficit problem. That is not confidence in the U.S. and the ability for us to come to any agreement about the long term deficit. This is a lot of noise and a lot of hysterics, but not really getting to the core issues of the problem and that worries me because we have a lot of foreign investors counting on us getting it right.

HOBSON: We’re going to get to that in just a second, Diane Swonk, chief economist at Mesirow Financial, thanks as always.

SWONK: Thank you.

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