When economic historians examine the wreckage of 2011, a fateful milestone will stick out: Jean-Claude Trichet’s April 7 decision to raise interest rates in the euro zone.
Like kicking a guy when he’s down, the European Central Bank’s move was a classic pro-cyclical policy response. The rate increase, which took the ECB’s key lending rate to 1.25 per cent from 1 per cent, compounded the downward spiral in the euro zone by ratcheting up the stress on the region’s most indebted countries and their ailing banks.
The conditions are as good as they get right now for printing money. The euro zone enjoys a current account surplus, low inflation and an overvalued currency. Demand from fast-growing China and India is lapping up the excess supply of everything the world’s wealthy countries can produce.
Governments have shown a willingness to bail out systemically important companies. The ECB should treat euro-member countries the same way.
For more: EU leadership needs to go against the grain with debt crisis - The Globe and Mail
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