Tight Money Is Choking Europe

The bottom appears to be falling out of Europe's economy. Stunned CEOs, especially those in high tech, are reporting diving profits. Growth is decelerating. The euro is weak. Unemployment is rising. And yesterday's brave talk of Europe not being affected by the U.S. slowdown is replaced by serious worry over how low Europe may eventually go. Unlike the U.S., Europe suffers from the twin burdens of heavy capital flight and second-rate monetary management.

The litany of unexpected drops in earnings eerily echoes what happened in the U.S. in the first quarter. Philips Electronics and Siemens on the tech side as well as steelmaker ThyssenKrupp and car-glass manufacturer Pilkington are now warning of profit woes ahead. American companies in Europe, such as Sun Microsystems Inc., appear to have been taken by surprise as well.

The European Central Bank isn't doing much to help with a paltry 25 basis-point cut in interest rates. Indeed, it appears intent on fighting inflation rather than spurring growth. But higher European prices are due to energy and food (mad cow disease), not rising labor costs. The tight ECB monetary policy is actually fostering inflation by slowing growth and weakening the euro, which raises dollar prices for imports, especially oil.

Meanwhile, European CEOs are making a dash for U.S. corporate assets. Alcatel appears to have just missed buying Lucent Technologies, while Vivendi Universal has gobbled up Net music operator MP3 and is poised to take publisher Houghton Mifflin. They're the latest companies to send their capital across the Atlantic because of low growth prospects at home.

There's no secret in knowing what needs to be done. The ECB just has to do it.

Before it's here, it's on the Bloomberg Terminal.