No need to be defensive

If Europe's Central Bank had been in charge of American interest rates, then the US economy might never have enjoyed the unprecedented growth of these past nine years. The ECB seems bent on increasing interest rates in the euro area, even though Euroland's economy has barely emerged from the period of constraint when it had to sweat off excessive debt to bring fiscal policy into line with the Maastricht criteria. Now, at the first whiff of stronger growth, the bank wants to slam the brakes on again. It is worried about the weakness of the euro and the fact that inflation has breached the 2% ceiling it is supposed to defend. Yet if higher interest rates smother the recovery, the euro could end up falling not rising. In the long run, strong currencies are associated with strong economies.

Technically, the bank is right to worry about inflation since it is required to keep it below 2% (it is now 2.4%). But the overrun is largely due to the rise in oil prices which has affected the whole world. The ECB is worried that a weak euro will push inflation even higher - but higher interest rates are unlikely to boost the euro because its weakness is mainly a consequence of the strength of the US economy. If the ECB raises interest rates next week it will not be able to test whether Europe's economy might itself be on the verge of US-style growth. If it were, then the euro would recover without higher interest rates.

Europe should have more confidence in itself. Where are the risks in going for growth? Euroland will a have whacking trade surplus of $132bn this year, according to the OECD, and with pay rising at only 2.3% a year and with unemployment at 9.1% it could grow for some time without encountering labour shortages. Euroland is also over 90% self-sufficient, so most of the benefits of imports and exports will be self-reinforcing. The euro could also benefit from the recent moves to unlock the complex cross holdings in German industry - which should open up the economy to more takeover bids, particularly from American capital, thereby boosting the euro. No one wants to go back to the hyperinflation of the 70s, but circumstances are very different now because of the deflationary forces unleashed by globalisation and the internet. There is no reason why Euroland cannot have the sort of sustained growth than both the US and the UK have enjoyed. But first, the central bankers have to believe it is possible.