Unexpected rises in German and French business confidence on Wednesday strengthened the European Central Bank’s hand in resisting calls for lower interest rates as it grapples with a protracted inflation surge.
The surprise brightening in the economic mood in the eurozone’s two largest economies suggested fallout from the US subprime mortgage crisis and soaring euro has so far been limited.
The data coincided with a strong defence by Jean-Claude Trichet, ECB president, of the bank’s decision to leave its main interest rate unchanged despite sweeping cuts by the US Federal Reserve.
Cutting interest rates would have led to ordinary citizens suffering higher inflation, Mr Trichet told the European parliament. “They would have been bailing out the banks. That is where I see a very real example of moral hazard.”
Eurozone inflation, currently at a 14-year high of 3.3 per cent, would remain high for longer than expected and significantly above 2 per cent for most of this year, the ECB president warned.
But the German and French business survey results supported policymakers’ view that the slowdown in eurozone growth remains gradual, even as the US outlook deteriorates rapidly.
“Decoupling is impossible because we’re in a globalised world, but Europe’s resilience has improved due to structural reforms,” Klaus Regling, head of the European Commission’s economics department, told journalists in Frankfurt.
The Munich-based Ifo institute said its German business climate index had risen for the third consecutive month, boosted by greater optimism about business conditions but also an improvement in expectations for the next six months. At 104.8 in March, after 104.1 in February, the index was at its highest since August.
In France, the Insee statistical office reported its business confidence index rose from 107 in February to 109 this month – the highest level this year.
Christine Lagarde, French finance minister, said the country was “resisting rather well” the global crisis, even if Paris had cut its growth forecast for this year. Reforms by the new government “were ahead of time and a smart move”, she said.
Both surveys pointed to more optimism on exports compared with February – suggesting that the euro’s surge to fresh highs had yet to have a serious impact.
In his comments to the European parliament, Mr Trichet said considerable uncertainty remained about the impact of financial market turmoil but that allowing inflation expectations to get out of control would only exacerbate instability.
A “change in culture” was needed to avert financial crises, he said. Greater transparency was one requirement but Mr Trichet also hinted he would seek sweeping changes to regulatory practices.
●Mr Trichet on Wednesday for the first time defined the period over which the ECB aims to keep inflation under control. The ECB has long stated that its aim is to keep the annual eurozone inflation rate “below but close” to 2 per cent over the medium term. Mr Trichet told the European parliament that “medium term” meant 18 to 24 months.
