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. Last Updated: 07/27/2016

Inflation Crashes Central Bank’s Party

FRANKFURT — Sky-high fuel and food prices crashed the party when finance ministers flocked to Frankfurt to celebrate the inflation-fighting European Central Bank’s 10th birthday on Monday, a milestone in Europe’s monetary union.
ECB chief Jean-Claude Trichet set the tone, warning that bad management of the oil crisis in the 1970s — meaning large wage rises and low interest rates — seriously hurt the economy and jobs, and that the errors of the past must not be repeated.
As truckers and taxi drivers blocked a refinery in France and awaited support from fishermen in the latest of protests across several European countries, France called on ministers to think about a cap on the VAT sales tax levied on fuels.
Despite mounting protests, several ministers acknowledged the pain but said governments could not and should not slash taxes or condone big wage rises to compensate, warning that this could turn a possibly short-term problem into a long-term one.
Ireland’s Brian Lenihan, worried about the potential impact on national pay negotiations in his own country above all, said wage awards should not be indexed to the latest rises in food and fuel costs.
“If we do that, it will store up trouble for ourselves in the future,” he told reporters as he entered talks with Trichet and ministers from the rest of the 15-nation euro currency group.
The finance ministers were holding talks on the state of the economy in the morning, before ECB birthday party celebrations attended also by central bankers and guests including German leader Angela Merkel.
French Economy Minister Christine Lagarde went on a charm-offensive to sell an idea President Nicolas Sarkozy floated last week, that the European Union should consider capping sales tax on fuel products if prices kept rising.
German Finance Minister Peer Steinbrueck and Dutch colleague Wouter Bos gave that idea short shrift.
“I think France already has quite a few problems in bringing its budget in order. Cutting taxes will not necessarily make it easier for them,” Bos said.
Steinbrueck said Europe should stick to a collective promise made in 2005 in the English city of Manchester — namely that no EU country should break ranks by making major tax cuts to ease the pain of high fuel costs, partly because they fear it would play into the hands of oil-producing nations.
“We should stick to the Manchester declaration. That means not responding politically and trying to intervene.”
Jean-Claude Juncker, Luxembourg’s prime minister and chairman of meetings of euro zone finance ministers, said much the same of the Sarkozy suggestion.
“I think that this idea goes against the general spirit,” he said in an interview on French radio ahead of the meeting.
In a letter released to the media as ministers met, Lagarde said France supported the EU policy but that this should not rule out short-term palliative measures.
The trouble in Europe, like the rest of the world, is that the region is being hit as well by soaring prices for food, an even bigger part of household budgets.
Austrian Finance Minister Wilhelm Molterer said he would ask his fellow ministers to consider a tax to counter speculation in commodities futures markets.
Molterer told Monday’s edition of Austrian daily Kurier that roughly $40 billion had gone into commodities speculation over the past five months.
“This strong speculative element is responsible for part of the rise in prices,” he said. “Politicians must act here. I will therefore put forward such a tax to my fellow finance ministers today. We’ll see how they respond to it.”
The idea might be problematic for Britain as one of the key centers of commodity futures trading but it had to be addressed, he said.
The recent price spikes are as much about food as oil, and even more so in poor countries where the soaring cost of food commodities such as wheat, corn and rice has a more direct and immediate impact on millions.
Dozens of leaders are due to meet this week in Rome to discuss the global food crisis, as well as to consider emergency humanitarian aid and perhaps longer-term challenges.
The prices of many food commodities have doubled in the last two years and are likely to remain high for the next decade even if they retreat from recent records, according to the OECD and the UN Food and Agriculture Organization.
Inflation in the euro zone, which also risks a quite sharp economic slowdown, is running at a record 3.6 percent.