After yesterday's 50 basis point rate cut by the Federal Reserve, the European Central Bank in its usual form refused to do anything, despite the fact the Eurozone economies are substantially weaker than the US economy. Unemployment is higher and economic growth is lower. The ECB insists on fighting the previous war against inflation by trying to get it under its own 2% "reference rate," which in practice has acted more as a ceiling rather than aas a symmetric inflation target. But the main problem for the ECB is the divergence of the Eurozone economies in their economic cycles and the corresponding macroeconomic indicators. The ECB has the task of fitting the one square peg of monetary policy into the 15 oddly-shaped holes of national economies. It just does not work. The Monetary Union project is headed for longer-term problems.

The German economy is now on the verge of a deflationary spiral and the current interest rate is way too high. Of course, the problem is compounded by the fact that the German government is doing exactly the wrong things by raising taxes in order to try to stick to the Stability Pact. But inflation in other parts of the Eurozone, such as in Italy and the Netherlands is much higher. Yet if Germany does indeed sink into the morass of deflation, then the whole of the Eurozone will be dragged down with it to some extent. This is the real danger the ECB should be focusing on.

This talk of what the central banks are doing also points to a scarier problem. Central bank policy has now become the choke point of modern economies. It's the single point of failure that can strangle an otherwise healthy economy, and having fewer central banks around the world just reduces variety and competition. If one of them screws up, it affects the domestic economy, but now we have the Fed, the Bank of England, the ECB and the Bank of Japan as the major players. Japan is already paddling up many creeks with miasma emanating from every pore, Europe is sickly and the Bank of England and the Fed have not screwed up in a big way recently. They still could.

Variety and competition are good things as they build resilience into the system, allowing it to function more robustly. Also, it makes the system handle failure modes more gracefully. A monetary monoculture can be wiped out by a single antagonist organism. But building more diversity into the global monetary system is going to be hard to do. Private currencies are the answer, but there are serious implementation issues with that. That's a topic for another day.