Eurozone Watch

Last Monday, French President Nicolas Sarkozy once again pushed for an old French idea, the "gouvernement économique" for the Eurozone. In his speech in front of the European Parliament, the acting EU Council President reinterated the French quest that the governance structures of the European Monetary Union should be strengthened in order to allow for more politics in the management of the Eurozone economy.

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Only three months after its last rate hike, the ECB has yesterday prepared verbally for a sharp turnaround.  In contrast to former press conferences, President Jean-Claude Trichet stated that it is now clear that “economic activity in the euro area is weakening, with contracting domestic demand and tighter financing conditions.” According to him, “upside risks to price stability have diminished somewhat”, even if “they have not disappeared”. Importantly, the phrase that the “current monetary stance will contribute to achieving our objective” has been missing from the statements. Most observers read these changes in wording as a signal for an imminent rate cut, possibly as early as November with more cuts following until next spring (see for a good analysis Aurelio Maccario on RGE monitor).

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