It will be interesting to see whether deeds follow words. ECB president Trichet says that he is committed to inflation fighting even after the stock market decline in Europe and the 75 bps cut by the Fed. The market is betting that he will cave with a rate cut. We will see the resolve of the ECB if economic growth further slows.
This tightrope walk between policy choices places more focus on Euroland economic numbers. The central bank's argument is that Europe is decoupled from the United States. There is a lag in the timing and the impact will be less. The economic research on this issue is mixed. The economic line of causality is usually from the the US to Europe for most economic disturbances and announcements. The economic impact is less than what would occur in the US, which is consistent with the ECB thoughts. However, there is the issue of slowing exports because of a higher Euro and the fact that growth is already slowing in Euroland. European growth is tied closer to world growth which makes it different from the US. The ECB may delay their action but then they could be behind the curve like the Fed.
This tightrope walk between policy choices places more focus on Euroland economic numbers. The central bank's argument is that Europe is decoupled from the United States. There is a lag in the timing and the impact will be less. The economic research on this issue is mixed. The economic line of causality is usually from the the US to Europe for most economic disturbances and announcements. The economic impact is less than what would occur in the US, which is consistent with the ECB thoughts. However, there is the issue of slowing exports because of a higher Euro and the fact that growth is already slowing in Euroland. European growth is tied closer to world growth which makes it different from the US. The ECB may delay their action but then they could be behind the curve like the Fed.
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