European Central Bank President Mr Wim Duisenberg remains firmly squeezed as he juggles economic growth and the threat of rising inflation in the euro zone.
His decision to leave euro interest rates unchanged yesterday was no surprise, although it did nothing to halt a further selling spree of the euro. Economists are divided on the tack Mr Duisenberg should take to help alleviate this dilemma. Bank of Ireland chief economist Dr Dan McLaughlin said to cut rates further was the best move as he believed euro recession was the main problem, not inflation.
If the ECB delayed cutting rates, a massive slowdown could be under way, he warned.
The ECB started the year with a growth forecast of 3 per cent for the euro zone.
It has now revised this down to 2.5 per cent. Dr McLaughlin said this was still way too optimistic.
"The simple problem is the two major economies in the euro zone have slowed to below trend growth." Data from Germany was saying it could go into recession, he said, adding that French GDP growth, which showed an annualised growth rate of 2 per cent, was also of grave concern.
He blamed recent price hikes on special factors.
The foot-and-mouth crisis was a primary cause of price rises in the food sector in Europe. A second factor was rising oil prices which have spiked back up again. "The real issue, if you strip out food and energy, is that euro inflation is still under the 2 per cent target of the ECB," Dr McLaughlin said.
Mr Jim O'Leary, chief economist with Davy Stockbrokers, says the ECB's main mandate is not about economic growth, it is to control inflation. "They were under a lot of pressure to cut rates recently and they did - which has disarmed their critics to some extent," he said. "I think they are likely now to revert to type and move back to their main mandate - containing inflation. They will be slow to cut rates again."
What the economists do agree on is that the euro's performance is tied to the confidence people have in the zone's economic future and the ability of those in power to direct it.
What is undermining confidence further is a lack of security in knowing what the ECB's policy is.
