Prices rise as European Central Bank battles solvency crises

William Ickes

Agence France Presse

FRANKFURT, Germany: Inflation is on the rise as the European Central Bank tries to deal with diverging euro zone economic trends and China positions itself as a potential friend for indebted governments.

The E.C.B. has been battling solvency crises in peripheral euro zone countries and supplying commercial banks with cash to ensure lending to the 17-nation economy but must now again consider its primary mandate: price stability.

Euro zone inflation was expected to hit 2.2 percent in December, the first time in two years that it will have breached the central bank’s target of just below 2 percent.

Climbing energy and food prices indicate inflation can no longer be considered a back-burner issue, complicating the E.C.B.’s task as it works to help banks strengthen their reserves and capitals to solidify their finances.

If confirmed, the latest reading would oblige the E.C.B.’s president Jean-Claude Trichet to take another look at what he says is the only needle on his compass.

“The E.C.B. faces the tough task of balancing a raft of bad news from the euro zone’s periphery with the more positive developments elsewhere and the fact that inflation has risen above target,” said Ben May at Capital Economics.

He and other economists nonetheless expected the inflation increase to be short-lived as it stemmed in large part from a spike in energy and food prices.

And there was good news for central bank policymakers as well since euro zone economic sentiment and business activity are picking up, the economies of heavyweights France and Germany are growing, and China says that it is here to help.

Vice Premier Li Keqiang visited Spain and Germany last week, and Spanish daily El Pais quoted government sources as saying that Beijing is willing to buy about 6 billion euros ($7.8 million) worth of Spanish public debt.

Goldman Sachs chief European economist Erik Nielsen was doubtful however that China or other sovereign funds would provide rescue financing to euro zone countries.

“Highly unlikely,” he exclaimed. “The political cost – implicit or explicit – would be too big for core Europe to accept the arrival in the euro zone of financial rescuers from China, the Middle East or Russia.”

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