Take a quick look at the news an see how many times the expression 'raising tensions' appears on articles lately when talking about the situation in the Middle East. I am sure you do not have enough fingers to count them... Now take this same expression but exchange the word 'tensions' by 'interest rates' and see everybody panic and run for their lives. Although we have lived (and we are still living) one of history's longest period of low interest rates, people keep asking for more. Governments and enterprises around the world have grown so accustomed to debt issuing and uncontrolled spending thanks to cheap money that mentioning the slightest interest rate hike makes them shiver.
The key factors to justify a (slight) interest rates raise are all there though: we have growing core inflation, uncontrolled energy prices, excessive debt and severely depreciated currencies. On the other side we have a weak, mostly artificial recovery (already mentioned), that depends heavily on the availability of cheap money. Which side has a more important impact on the future status of the economy? It is clearly the first one, no hesitation. The Middle East turmoil is not coming to an end soon, and until it does the oil barrel price will keep rising, putting even more pressure on inflation control measures.
More inflation in the actual scenario we are facing would kill all recovery aspirations on the medium and long-term, even if it now seems detrimental for the short-term.
Do not get me wrong, as of now, a raise in interest rates will be hard to handle, specially for debt-burdened countries like Greece, Ireland or Portugal. It would be bad for Spain too even if its debt situation is marginally better, because all the semi-public savings banks (called 'Cajas de Ahorros') are now undergoing reforms to transform themselves into normal banks. A process that needs, and will need, a lot of funding and bond issuing on their part. For these troubled countries higher interest rates mean only one thing: more expensive financing, that is all they can think of when they hear these words.
The ECB (European Central Bank) must think beyond this situation though. They must enter a damage control phase, as they can not let struggling countries set the pace for stable countries. At first sight it may seem like raising rates means sacrificing a pawn to save the king (Germany) or the queen (France) but truth is all the eurozone can benefit from this in the long-term. Financing would get more expensive, that is for sure; and troubled countries would struggle at first, but the long-awaited creation of eurobonds will help stabilize their debt, partly neutralizing this problem. Anyway I do not think a slight raise in rates would massively change the 'pawns' situation or send them inexorably to a debt default...
The good part of the raise (for everyone involved) would be its effect in containing inflation. More inflation now is what can really stop the recovery, we can not afford less goods consumption, stopping inflation is key. A little, and controlled, inflation is good for a growing economy, but our economy is not expansive enough to justify being permissive with inflation as some economists are suggesting as of late. A contained inflation would help maintain people's purchasing power despite salary freezing or slow downs (that is the ugly situation we are seeing lately with salaries), thus giving a push to a real-world recovery based on economic growth, not on easy financing and debt.
There is a last factor to tackle though, the euro exchange rate against other currencies. At the actual rates the euro is solely hurting exports, and controlling inflation would mean nothing if the currency is such a heavy load on the exports of its participants. The ECB has the key.
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