A few weeks back, Nouriel Roubini invoked the game of chicken metaphor to describe the current war of wills between Eurozone finance ministers and the European Central Bank, laying out all the ways the game might end:
1. The fiscal authorities blink and they adjust fiscal policy.
2. The ECB blinks and we get higher inflation.
3. Neither side blinks and the unsustainable debt leads to default by some Eurozone countries (this is a form of final blinking by fiscal authorities as they move to a capital levy, i.e. a tax on holders of public debt)
4. The Euro sharply falls reducing the real value of the Euro debt held by foreign (i.e. non EU) residents; this is a capital levy on non residents.
Over at A Few Euros More, Edward Hugh updates us on how the game is progressing. Here's the story in headlines, first from EUobserver...
ECB set to clash with eurozone ministers after rates increase
...and again...
Trichet says interest rates rise good for EU citizens
... followed by this, from the Financial Times:
ECB has ‘no plans’ for series of rate rises
The "series of rate rises" is the key qualifier there, as the expectation is still that rate hikes are a-comin':
The ECB is expected to raise rates in December for the first time in more than two years...
His comments, which led to the euro falling against the dollar, reinforced many economists’ expectations that the ECB will follow a quarter percentage point increase next month with maybe a further increase early next year before pausing. But Mr Trichet defended strongly the ECB’s decision to lift rates from the 2 per cent level that has remained unchanged since June 2003...
The ECB’s willingness to raise interest rates has pitted central bankers against finance ministers. Jean-Claude Juncker, the Luxembourg prime minister and the political “Mr Euro”, said on Monday that higher oil prices were not feeding through into higher wages. “I have said on several occasions that there are no second round effects of wages policy and therefore there is no need to raise interest rates,” he said.
Mr Juncker’s comments reflect the views of many of the 12 eurozone finance ministers, whose monthly meeting he chairs.
As I noted in earlier post, the modern judgment is that a blinking central bank does no one any good. But, as Mark Thoma warned us just the other day, that independence shouldn't be taken for granted -- right before showing this picture of why many are convinced it really matters:
That evidence was collected and analyzed well before the creation of the ECB -- see Mark's post for the citation (and contrary opinions). It's pretty interesting to be watching another data point in the making.
UPDATE: Edward Hugh channels the Financial Times Paul de Grauwe, who argues that the ECB may be overplaying thr inflation scare. Toni Straka finds that the folks at Deutsche Bank may be thinking the same thing (although he is not enthusiastic about their use of core inflation in coming to that conclusion). On the other hand, The Skeptical Speculator notes some good news on eruozone industrial production (along with the usual great roundup of other world economic news).