Recovery Could Create Headaches for Europe’s Central Bank

European collective suffering over Greece was interrupted by some good news on Thursday. German unemployment fell more than expected, while earnings increased for several state companies are the largest.
No one will complain about the signs of strong growth in Europe's biggest economy, which has 10 times the economic output of Greece. But the recovery of the northern part of the euro zone as a sink deeper into crisis, a southern suburb set up a dilemma for monetary policy makers can increase the already serious tensions in Europe.
If growth continues to gain in Northern Europe during the rest of the year, the European Central Bank in Frankfurt would eventually face pressure to raise interest rates to restrain inflation.
But the rate increase could be dangerous for Greece and Spain, Portugal and other countries with debt problems, high raise borrowing costs for both government and business.
The central bank "can not take the risk of inflation in the euro area for the benefit of the three countries," said Zsolt Darvas, an economist at Breugel, a research organization in Brussels. "They will face higher interest rates, and it will be very difficult for them to solve their fiscal problems."
This view was generally held in Germany and nearby countries. The other view is that the suffering of liberating southern Europe should trump trying to combat future inflation with a heavy hand.
For central banks, fortunately, the day of reckoning may not come until early next year. With no sign yet that inflation is a danger, most economists do not expect the increase in its benchmark interest rate - now 1 percent - until March 2011, according to the Reuters poll.
But Jean-Claude Trichet, the central bank president, and board members who organize many other companies face difficult choices in the weeks and months ahead.
One risk is that the loss of faith in the solvency of Greece will spread to Portugal and perhaps Spain, another crisis threatening banks and forcing central banks to act.
The central bank has begun to gradually reduce the nearly unlimited cash it lent to European banks froze lending between banks after the year 2008. they believe the central bank can stop the process or even reverse it.