Berlin - The European Central Bank marks its 10th anniversary on Sunday amid challenges posed by renewed fears of inflation at a time when economic growth is slowing. ECB chief Jean Claude Trichet and his 21-strong governing council face one of the most testing periods in the bank's brief history as they grapple with the fallout from the global financial markets crisis.
For the moment, however, the ECB is talking tough about the threat posed by inflation. It is expected to leave its benchmark refinancing rate on hold at 4 per cent next week for the 12th month in a row after consumer prices in the 15-member eurozone rose a record 3.6 per cent in May.
"These are the most challenging times facing the ECB since its founding," said Rainer Guntermann, senior European economist with the investment house Dresdner Kleinwort.
However, it has been the ECB's success in turning the euro into a credible global currency that has helped the bank stand firm on rates and give it room to move in confronting what some analysts have described as the first economic crisis of the 21st century.
Apart from helping undercut inflationary pressures and allow the ECB to buy for time on rates by tightening monetary conditions, the euro's current strength has also helped shore up faith in the ECB, with the bank having faced only sporadic criticism of its decisions over its first decade.
Part of the credit for this would have to go to Trichet, who after becoming ECB chief in November 2003 has successfully honed the bank's communications skills and helped promote its authority in the world's fickle financial markets. This is despite the periodic attacks on the bank from national politicians.
Since it took over as the eurozone's chief monetary custodian in June 1998, the ECB, which prides itself on predictability and a fierce anti-inflationary stance, has emerged as a key symbol of Europe's ambitions for greater integration.
Given the economic tensions that have built up in recent months, one false step by the ECB could rebound badly on the bank and severely damage its credibility.
After a shaky start, the euro hit an all-time high of more than 1.60 dollars in April with the US currency having weakened as the Federal Reserve, the world's leading central bank, moved to shore up economic confidence in the United States by slashing rates.
The euro's current strength is a long way from the common currency's early days following its 1999 launch. With the eurozone overshadowed by what was then robust US economic growth, the euro sank to a record low of 82.52 US cents in October 2000.
More recently, a solid performance by Europe's biggest economy, Germany, has helped the eurozone economy appear to be withstanding economic tremors triggered by the US mortgage market crisis.
But complicating the ECB's economic management tasks has been a sharp growth divergence across the eurozone that has taken shape since the financial crisis emerged last year.
While solid export demand has helped power German growth, the credit crunch has dealt a blow to key euro member states such as Spain, Ireland, and France where up until recently booming property markets have been a driving economic force.
This raises the prospects of the ECB's somewhat unwieldy 21-head governing council facing clashes between national members pressing for rate cuts to help shore up growth and the council members taking a more hawkish stance on the risks posed by resurgent inflation.
Also possibly accentuating council tensions has been the expansion of the eurozone from 11 members when it was forged in 1998 to 15 members today with the admission of Slovakia next January expanding the council membership to 16.
The membership of the interest-rate setting bodies of both the Federal Reserve and the Bank of England is under 10.
As a result, the eurozone's expansion threatens to spark pressure from some of the bigger eurozone states for moves to consider giving more weight to their economic importance on the council.
However, the ECB has already drawn up plans to peg the membership of the governing council in the future, especially as bigger nations from Central Europe sign up to the euro.
In the meantime, forecasts that consumer prices in the eurozone will continue to climb in the coming months have also meant that the ECB finds itself marking its 10th birthday facing questions about its target to keep inflation close to but just below 2 per cent, which lies at the heart of its prime objective for price stability.
This is especially the case as the ECB has battled to meet the tough target with annual inflation averaging 2.1 per cent over the last decade.
