If financial markets were not fretting about Greece, what would they be worrying about? In quieter times, more might have been made of diverging views on the European Central Bank’s governing council over the inflation outlook.
As I noted in previous posts, Axel Weber, the Bundesbank president, and Jürgen Stark, ECB executive board member – both German - have both warned that inflation risks are tilted upwards – contradicting the official line that they remain broadly balanced. Their comments suggested their hawkish instincts remain undimmed, even if eurozone inflation, at 1.4 per cent, is undershooting the “below but close” to 2 per cent target and likely to do so for some time.
Now, Marco Annunziata, chief economist at Unicredit, has put out a note arguing that the Weber/Stark rebellion is in fact related to the Greek crisis. The help the ECB has given Greece – for instance, in reducing the risk that Greek assets could be excluded from use in liquidity-providing operations - could have raised concerns about the central bank’s credibility
, he writes. At the same time, there could be fears that the International Monetary Fund’s involvement in Greece will constrain the ECB’s hand when it comes to setting interest rates.
As a result, the argument goes, Mr Weber and Mr Stark are rattling the cage. “The first step towards retaining credibility must be for the ECB to refocus on its primary objective [controlling inflation], stepping away from issues that have a much more complex and controlled dimension,” Mr Annunziata says.
Still, the worries about inflation in the eurozone would seem overdone to most ECB watchers. And as Mr Annunziata concludes: “Excessive reliance on tough talk might eventually backfire if it is not consistent with a balanced assessment of the macro situation.”
