Hawks down

ECB/France: Some nasty numbers are going to force the European Central Bank's hawks to think. French inflation is down to 2.1 per cent and growth is at zero. This is a challenge to the ECB's line that it must ignore crisis in the euro zone's weaker states and focus on controlling growth and inflation in the core. The thinking unravels if France itself is weak, with growth stalling, inflation easing - and a sovereign downgrade threatened.

The ECB's task is, of course, perennially difficult. It must set policy for diverse economies but its judgement must be of the strength and likely inflation prospects for the euro zone as a whole, not individual countries in crisis. The question is whether it has got the judgement badly wrong and should not have raised interest rates twice to their current level of 1.5 per cent.

Average euro zone inflation is running at 2.5 per cent, which is only just above the central bank's target. Inflation in Germany, the biggest and strongest link in the ECB's troublingly diverse ring of economies, is 2.6 per cent on the harmonised European Union measure, or 2.4 per cent on Germany's own formulation. The detailed German figures show energy prices rose by 10.6 per cent in the past year. Exclude them and German inflation falls to just 1.5 per cent. The recent tumble in global oil prices is another factor that may bring euro zone inflation swiftly back down. The chief influence over inflation should be overall euro zone growth. Here the signs are of worrying weakness. Industrial production rose by only 0.3 per cent in the second quarter. Overall GDP growth for the period, released on August 16, may come down to that meagre pace.

But the ECB, unlike the Bank of England or US Federal Reserve, has tended not to allow for possible temporary influences such as soaring commodity prices, even though they dampen rather than increase consumer spending and should ultimately be disinflationary. In 2008, it raised rates just before the world went into cataclysm and then swiftly had to cut them hard.

This year's rate rises may have been damaging. French growth looks to have stalled. And France needs now to tighten fiscal spending drastically, which makes offsetting low interest rates desirable. It is fiscal policy that needs tightening in the euro zone, and not monetary policy. The ECB hawks have got the crisis wrong again.