Spanish Business News

Tomorrow is likely to be the day when the first developed world central bank cracks under the burden of soaring inflation and starts tightening.

The European Central Bank (ECB) will be pleased it is first. It shows it is true to its Teutonic principles and will not countenance the sort of naughty inflationary growth driven by a cheap currency and de-valuing debt upon which the rest of the developed world thrives.

For us simple minded observers the problem for the ECB seems simple. It can either stamp out inflation in Germany but in the process allow the cost of peripheral debt to soar, forcing re-structuring and possibly defaults. Or it can allow inflation in Germany to rise but lend a helping hand to peripheral Europe.

Of course the policymakers on the ECB's governing council do not see it that way. They have succeeded in compartmentalising their thinking. Why have they done this? Put simply because they believe they can control the problem in peripheral Europe with 'special measures'. They won't let Portugal run out of money - they will buy the debt and trust their political friends will hand out cash at a rate that can be afforded. So in that sense they feel able to put aside their core decisions on rate rises from this debate.

The issue though is not whether the ECB action plunges basket-cases like Portugal over the edge. Rather it is how its actions affect Spain. This domino has been deemed too big to fall by European policymakers. But it could fall. Its politicians may be cocooned inside the vain belief that there are structural buyers of Spanish debt but there probably aren't nearly enough if it came under sustained attack in the money markets.

Read the rest of the article at citywire.co.uk