Raising the White Flag

It is not easy for many to admit that they made an error. It seems the President Trichet might finally be starting to embark on that difficult path. After raising rates in the Euro-Zone over the protests of many top figures within that continent, Trichet finally admitted what the rest of the world had realized some time ago: the Euro-Zone’s growth prospects are weak. This announcement/confession reflects that the ECB is starting to question if it did the right thing in raising rates. By hiking interest rates, the ECB indicated that it believed that growth would not be hurt too much by their inflation-targeting movements. It seems as though they were mistaken.

While admitting a mistake is a rarity for many, it seems that is even less frequent for public figures. Powerful men and women at the top of their fields have usually ended up there by making correct decisions, and so the idea of messing up can seem foreign. However, with the future health of the European economy largely riding on the ECB’s next move, it is time to these men and women to bite the bullet and cut rates. By alleviating this pressure the ECB will, among other things, send the message that they take growth very seriously and are committed to the economic prosperity of the European Union.

While inflation is very important, the ECB should currently direct its focus towards growth. Inflation targeting is not a cure-all, and if attacking inflation includes the ruin of the Euro-Zone’s economy, then that does not strike me as very helpful.

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