Mr. TRICHET & THE L-WORD
. Jean-Claude Trichet, President of the ECB, Frankfurt am Main, 8 March 2007

The European Central Bank raised its target for the key short-term rate from 3.50% to 3.75%, "in view of the upside risks to price stability over the medium term that we have identified through both our economic and monetary analyses". Mr. Trichet mentioned the L-word at least three times in his statement: "... money and credit growth [remain] vigorous, and liquidity in the euro area ample by all plausible measures ... Following several years of robust monetary growth, the liquidity situation in the euro area is ample by all plausible measures ... In an environment of ample liquidity..."

Remarkably, the decision was criticized by Banque de France. The French central bank published a report that raises "serious questions about the reliability of M3 growth as a pillar of the ECB's monetary policy strategy". (Mr Trichet said the ECB acted in part to curb the 9.8% rise in the M3 money supply, the highest since the creation of the euro.) The Daily Telegraph has more:

"The existence of a strong, stable, and predictable relation between money and prices in the euro area cannot be taken for granted," it said. The implication is that M3 data is causing the ECB to over-tighten.The policy revolt comes after repeated attacks on the ECB by French political leaders, who argue that rising rates are pushing up the euro, with dire effects for Airbus and France's car industry.

Aside from the obvious politics at play (general elections coming up in May), I think Banque de France does have a point. The more your currency becomes an international reserve asset, the less relevant the purely domestic monetary indicators. Remember 1998 in the US?