Challenges ahead as European CB celebrates its 10th anniversary

By refusing to slash interest rates, the bank and its president, Jean-Claude Trichet, have steered a different course from that chosen by the U.S. Federal Reserve and the Bank of England, following its mandate from the Maastricht Treaty, which paved the way for the single euro currency and the bank itself.
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The treaty mandates fighting inflation as the ECBs main priority, and Trichet and the other members of the rate-setting governing council have stayed firmly with that message despite criticism their stance has pushed up the strong euro, potentially hurting European exporters.
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"Stable prices are essential," Trichet wrote in the foreword of a special 10th anniversary edition of the ECBs May monthly bulletin, released this week.

"Not only because they protect the value of the incomes of all and particularly of the most vulnerable and the poorest of our fellow citizens, but also because delivering price stability and being credible in its delivery over the medium term is one of the preconditions for sustainable growth and job creation," he said.
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The bank has kept its key rate at 4 percent since June 2007 to fight inflation that hit a record high of 3.6 percent in March and again in May, well above its stated goal of around 2 percent.
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Holger Schmieding, an analyst at Bank of America in London, said the bank faces a "severe challenge" from high oil prices and signs that growth may slow. But he praised the bank for showing its moves to make large amounts of short-term credit available to banks worried about liquidity - while clearly separating that policy from its strict, inflation-fighting stance on interest rates.
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"They haven’t been panicked to cut rates, and the current data indicates that that was the right response. Right now they’re at a roughly neutral level of rates and they can probably stay there for quite a while," Schmieding said.
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The European Central Bank came into being June 1, 1998, as 11 European countries drew closer to merging their currencies, although the official celebration will be on Monday, June 2. The euro was launched on Jan. 1, 1999 on financial markets, and euro notes and coins were introduced on Jan. 1, 2002. The bank now controls monetary policy for 15 euro countries.
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Although EU officials criticize persisting differences across the bloc, they say the euro has added 15 million new jobs in the last six years by making trade and travel easier.
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The euro is used by 323 million people with a gross domestic product of more than 4 trillion euros ($6.2 trillion). The ECB was founded with 11 members: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Since then, Greece, Slovenia, Cyprus and Malta have joined, with Slovakia expected to enter next year.
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The euro currency has recovered strongly - some say too strongly - from an initial slump that saw it as low as $0.82 in 2000.
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Still, the ECB - as all central banks - has its work cut out for it amid the credit crisis and high oil prices.
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A slew of economic reports pointing to a recession in the U.S. have seen the dollar slump against the euro. On Friday afternoon 1 bought US$1.55. That hikes the cost of euro exports to their main market in the U.S. although it also helps cut the cost of dollar-priced oil imports.
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But the strong euro cannot keep back the full brunt of soaring oil prices. Energy and food prices are starting to hurt consumers wallets.
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High inflation is now Europes biggest economic challenge as the ECB stays away from pushing the main lever of economic growth - changing interest rates - and urges governments and employers to prevent an inflation spiral by allowing large pay rises.
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The ECB faces a dilemma because slashing interest rates - to encourage reluctant banks to lend - could likely fuel inflation by encouraging more borrowing.
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Instead Trichet is calling on euro nations to go further in opening up national markets for labor, goods and services to more trade. Knocking down these barriers would be a massive boost to growth, he says.
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Michael Schubert, an ECB expert at Commerzbank in Frankfurt, said Europes Central Bank has managed to clear away the doubts that surrounded the euro at the beginning 10 years ago.
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"The reality is that its functioned very well," Schubert said.