Not much is ever truly new in the world economy. In the late 1980s, the US (and most of Europe) was raging at Germany\u2019s Bundesbank for keeping interest rates high, consumption down, and the dollar unstable. Twenty years on and US determination to support growth is once again in conflict with European determination to crush inflation. The battleground, then as now, will be the exchange rate.<\/p>\n
The name of one protagonist may be different this time, but while the European Central Bank has taken over the power to set rates, it is the Bundesbank\u2019s intellectual child. Its sole mandate is to control inflation and, credit squeeze or not, it takes that goal seriously. Last week Jean-Claude Trichet, the ECB\u2019s president, signalled that, barring the unexpected, its base rate will rise to 4.25 per cent in July.<\/p>\n
An ECB rate rise would widen the gap with the US, where the Federal Reserve has cut rates to 2 per cent. Not only does the Fed\u2019s mandate require it to balance inflation with growth \u201d\u201c unlike that of the ECB \u201d\u201c but its \u201crisk management\u201d\u009d philosophy has led it to cut rates hard in order to insure against the danger of a severe recession. The two central banks have come to entirely different policy judgments.<\/p>\n
The conflict helps neither side.<\/p>\n