Averages can conceal as much as they reveal: yesterday’s release of Markit’s composite purchasing manager index (PMI) for the euro area suggests that the region is set for 0.5 per cent growth during the current quarter, with Germany doing the most of the heavy lifting. France, by contrast looks to be contracting again. That overall growth rate is only exciting in the context of the slim 0.2 per cent recorded for the first quarter. Superficially, it looks like the euro area is growing at a reasonable, if unspectacular, clip but the divergence between economies, particularly between those at the core of the union (the Dutch economy is in at least as bad a shape as is France), is disturbing.
How is the ECB supposed to respond to all of this? Of course, its mandate is to set policy for the area as a whole. There is more than a hint that policy so far has been overly weighted towards the performance of the German economy. Even so, Germany arguably requires a tighter monetary stance, while the rest of us are crying out for looser conditions. It is an exquisite dilemma, with plenty of echoes elsewhere. What we end up with is monetary police that suits nobody.
They do things differently in the UK. There, a property boom in London and parts of south east England has led to calls for higher interest rates. The new Governor of the Bank of England has resisted, preferring to rely on so-called macro-prudential rules. These are supposed to be deployed, instead of interest rates, to curb excess borrowing and lending, wherever it may occur (but are really all about the property market).
A large chunk of London’s property price spiral stems from its emergence as a world city and the behaviour of foreigners who view apartments in Chelsea and Mayfair as akin to safety deposit boxes - ones that pay interest if they can be bothered to rent them out. Should the Bank of England raise rates because of the peculiarities of the London housing market?
The UK’s largest domestic bank, Lloyds, this week moved, apparently in anticipation of impending macro-prudential legislation, to limit mortgages to four times salary. Given all that we have learned about previous property cycles it is surprising that such ceilings have not been considered before, but better late than never. Indeed, should similar rules be deployed in Ireland or, at least, in South County Dublin?
In any event, it is clear that something is going to be done about London property prices but the central bank recognises that raising UK interest rates to deal with a localised problem is hardly a rational basis for policy making. Interest rates will, nevertheless, rise, but only when the broader economy demands it, something that may happen sooner rather than later. All very sensible.
By contrast, the dog’s breakfast that is European monetary policy stands little chance of becoming rational. Arguably, that is not the fault of the ECB but rather the rules that were originally established with the advent of the euro. In the unlikely event of the installation of a web-cam at the ECB’s deliberations, we would probably hear a cacophony of voices arguing in all directions but the tone being set by the German representatives. Nobody questions the make-up of the ECB board: we all agree that a 100 per cent Greek membership, for example, would produce a very different, and unwelcome (for some, at least) outcome, so we settle on a group of people drawn from every member country. That seems sensible, all things considered.
But is it? Taking a leaf from the Bank of England’s playbook, is it worth looking at a change in the governance structure of the ECB? The British chose a Canadian for its most recent governor, mostly because of the terrific job he had done running Canada’s monetary policy. Maybe the ECB should try something similar. Indeed, to reduce the nationalistic noise at its meetings, maybe nobody from Europe should be a member of the ECB council. An all-Canadian group of technocrats for example. That might, just, produce a monetary policy that better suits the zone as a whole. The current one-size-fits-nobody policy has demonstrably failed.
