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If ECB rate increase in April shall be the exception and not a beginning unions must ignore the price increase of commodities

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Jean Claude Trichet, the governor of the European Central Bank - in his last week’s press conference after the governing council meeting of 3 March - was adamant, not only on the monetary policy ECB will follow over the coming months. He also had strong messages for governments and the social partners.

Trichet appeared very determined on a possible increase of ECB’s interest rates, making it look like this increase is rather more plausible than not. He rushed however, to make a clear distinction between standard and extraordinary measures, meaning by this that even if an interest rate increase materialises next month, ECB will keep intact its extraordinary measures in financing the Eurozone’s banks with ample and almost zero cost loans.

He also said that an interest rate increase in April will not initiate a series of the kind. If one takes into account his other remarks about a strong reprisal of economic activities in the Eurozone and a prediction that inflation will recede in the medium term, it is more that certain that the April increase will be the exception and not a beginning.

The truth is that this decision by the ECB is very much of the forced kind. Inflation has being ranging above the set limit of 2% for months now and Trichet should have spoken about an interest rate increase even from December last year. He did not want, however, in any way to annoy the financial sector of the economy, leaving the rest of the society to foot the bill. Against this background he repeatedly said that the main task of a central bank is to keep inflation pressures at bay and also made references to the fact that inflation is more costly to the lower income social strata, in an unusual rhetoric by a central banker.

Obviously he did that to cover up his real anguish over letting the financial sector profit as much it can from spinning around the zero cost money it receives from exactly the institution Mr. Trichet presides over. This is the real reason why he delivered this little social speech about the “poor”. It is not only the poor that pay the price for the financial sector refinancing but the entire working population.

To be sure that it is going to be this way, Trichet had more social observations to make. He had direct messages also for the social partners. He advised them, and this advice had in reality only one recipient; the workers unions, not to include in their wage negotiations the price increase of commodities. In this way he said the Eurozone will avoid triggering homemade inflation. He had no comments thought about who is responsible for at least one part of commodity skyrocketing prices and gave no advice to Eurozone’s major banks no to profiteer on sovereign debts. 

Last but not least Triche had a strong message to governments, asking them not only to reduce their fiscal deficits below the 3% of the GDP benchmark provided by the Maastricht Treaty, but bring it close to zero or produce positive results. He did not say what instruments to use to comply with his remarks, but it is obvious that the more “competitive” way to do this is to cut down social expenses, mainly those related to the labor market. In total ECB was too late to raise interest rates and is very early in asking trade unions for self restraint in the wage negotiations for 2011.

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