Rising Oil Prices, Falling Euro a Bitter Pill

Last week, oil prices breached $60 a barrel for the first time ever.

"Reckoned in euros, the price of crude oil has leapt about 60 percent since January. We're really facing a crisis," said Lorenzo Codogno, an economist at the Bank of America.

By comparison, the cost of a barrel of crude oil in New York has jumped just 38 percent.

On the one hand, the easing off of the euro, now worth about $1.20 as against 1.35 in January, has had a positive result, making eurozone exporters more competitive.

"But this positive effect will not really be felt for some months while consumers are affected almost immediately by price rises of imported products," Codogno said.

German inflation figures

A good example came on Friday with the publication in Germany of inflation figures for June. Residents of North Rhine-Westphalia, the most populous state in Germany, have seen their petrol prices rise 6.6 percent in a year while domestic heating oil have leapt 38.7 percent.

Furthermore, British Airways has announced that from Monday it is increasing the surcharge on its flights to offset surging fuel costs.

What could be better guaranteed to stifle consumption in Europe and its biggest economy, Germany, just as the winds of recovery were starting to blow?

The French government has just revised downwards its growth targets for this year to roughly two percent. The National Statistics Institute (Insee) reckons that the figure will be even lower at 1.5 per cent.

French Prime Minister Dominique de Villepin admitted last week that the historic high of $60 a barrel was "a heavy burden on us and our economy."

All eyes on ECB

All eyes are now fixed on the European Central Bank (ECB). Speculation on the possible lowering of interest rates is one of the chief reasons for the annual slackening of the single currency.

The recent lowering of interest rates by the Swedish Central Bank and the vote by two of the nine members of the Bank of England's monetary policy committee in favour of monetary relaxation has stepped up pressure on the ECB.

This month, German Economy Minister Wolfgang Clement urged the ECB to follow the Swedish example.

For the moment, the bank has turned a deaf ear. Its monetary policy is already "extremely accommodating," said Christian Noyer, governor of the Bank of France.

However, it has softened its tone of late and has stopped insisting that lower rates are not an option as its president Jean-Claude Trichet (photo) said in May.

The ECB's governors "are clearly not ready to act just at the moment. But if the indicators continue to be bad, they are going to revise their estimates for growth and inflation in September and perhaps cut the key interest rate, which has been set at two percent since June 2003," Codogno said.

The ECB is in a difficult position because the rise in crude oil prices while affecting growth, also fuels inflation. It is the bank's first job to keep inflation in check.