Bond Outlook [by bridport & cie, May 25th 2005]
| Political change is coming in Europe, and, subsequently, economic change. The expected "no" votes to the EU constitution by France and the Netherlands are obviously protests rather than reasoned consideration of a well thought-out proposal. It is less obvious just what voters are protesting about? Do they want more of a free-market regime, or more social protection? The latter seems the obvious answer, but why then are the Germans moving massively towards the CDU? |
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| If a common issue for protest can be identified, it is the sense of being pushed around by Brussels-based bureaucrats. Voters cannot do much about their distaste for Brussels, so they are turning on their own governments. More subtly, the ECB is also unaccountable. Central Bank independence is, according to growing worldwide experience, basically a good idea. Yet independence does not quite mean being a law unto oneself. The target rate for inflation might best be left to Governments (as it is in the UK, for example), but the ECB has set its own. Many consider the target of "under 2%" far too restrictive, but where is the debate on that choice? Does the European parliament ever discuss these things? |
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| It is absolutely extraordinary that another unelected body, the OECD, is telling the ECB to lower interest rates while Trichet is using a political argument (that lower rates would let individual governments off the hook to carry through on reform) to resist that advice. |