The European Central Bank's governing council should cut interest rates at its meeting today. The big continental EU economies are dangerously weak and the recent rise of the euro on the foreign exchange markets will further tighten monetary conditions.
The strong currency will slow growth further by hindering exporters who are selling outside the euro zone. For these reasons a cut in interest rates is now overdue.
Unfortunately, it is far from certain that the ECB will oblige. Recent statements from council members do not point towards a move today. However given new data this week point to further weakness in the German economy, a move cannot by any means be ruled out.
The euro's rise should also give the governing council pause for thought. It has risen by some 8 per cent against a weakening US dollar so far this year. Much of this has been due to concerns about the US economy and particularly about its widening current account balance of payments deficit. This deficit - broadly reflecting an imbalance in US trading with the rest of the world - has to be financed by capital investment flows into the US. The concern is that if the US economy does not soon recover, then assets such as US equities will not prove attractive to overseas investors, making the financing of the current account deficit more and more difficult.
The US may start to recover in the months ahead, which would lessen these concerns and prove a much-needed boost for the world economy. Certainly no other large economic bloc looks capable of lifting international growth this year, with Asia damaged by the SARS outbreak and EU economies flat.
Against this uncertain economic backdrop, the European Central Bank should be doing what it can to ensure some recovery in the euro zone. Its slow reaction to the downturn so far raises questions about its mandate - questions which the bank itself is examining in a review of its operations.
An anti-inflationary bias is all very well, but when the biggest economy in the euro zone is threatened with deflation, surely it is time to act.
A cut in short term interest rates would also provide some support for a weakening Irish economy, even if it would be unwelcome from the point of view of the housing market, where some price stability is now required. However it is very much in the long-term interest of the Irish economy to be part of a steadily growing euro-zone bloc.
The time for action from the ECB is now. Lower interest rates will not solve all the euro zone's economic problems. But they could help.