Wednesday, January 02, 2008

Cyprus & Malta Join Euro Area

Yesterday, Cyprus (the Greek parts) and Malta joined the euro area. This will have little effect on the euro area as a whole as their inclusion only boost euro area GDP by 0.2%. The main effect will come from the fact that this will increase the number of board members in the ECB board from 19 to 21. How these new board members will affect the decisions taken is more unclear. On the one hand, being Southern European countries are usually more pro-inflationists than Northern countries like Germany and Holland, so this could make the ECB even more inflationists. On the other hand, to the extent they base their decision on their national economies, this would make them more prone to raise rates as their economies will likely experience both high growth and high inflation the first years.

Although the fear of rising prices is usually described as a result of dealers taking advantage of the switch of currencies, that is an exaggerated problem and should to the extent it is real prove temporary as the supply and demand factors that caused the old equilibrium price haven't changed.

What however will push prices permanently higher is the ECB's inflationist policies which will raise demand so much that the equilibrium price will be pushed higher on a permanent basis.


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