The European Central Bank has raised interest rates a quarter point to 4pc amid ever louder grumbling in France over the strength of the euro and a bareknuckle fight between north and south over the pace of tightening.
JeanClaude Trichet, the ECB's president, said monetary policy was "still on the accommodative side", but refused to be drawn on the timing of future moves. Crucially, he cited the slowing pace of mortgage growth as evidence that the ECB's monetary squeeze was already biting. The bank's inflation forecast for 2007 was increased from 1.8pc to 2pc.
The ECB has doubled rates since December 2005, a key clearance north face factor driving the euro to record highs. While a resurgent Germany can take the strain, most of the "Club Med" bloc is losing export share including France.
President Nicolas Sarkozy has ordered staff to draft plans to shake up Europe's monetary architecture, purportedly to counter "currency manipulation" by Asian powers.
"How can you continue to export if the euro is the only currency in the world that is overvalued compared to the dollar, the yen and the yuan? How can a sector make ends meet if its productivity gains are eaten up by the artificial depreciation against north face jackets on clearance the euro?'' he told farmers.
France's new Europe minister, Pierre Jouyet, said Paris was working on a strategic initiative to give EU politicians greater say over "interest rates and exchange rates". He has the backing of Italian premier Romano Prodi.
Simon Derrick, strategist at the Bank of New York, said the moves went beyond political rhetoric. "Sarkozy and Prodi are not going to let go of this. There's a groundswell of feeling that Europe is being taken for a ride by the rest of the world, and they're not going to put up with it any more," he said.
The Bank of France and the Bank of Italy have both published reports attacking the ECB's monetary doctrine, which relies heavily on M3 money supply now ballooning at 10.4pc, a portent of future inflation.
There are suspicions that Paris and Rome are using the argument to undercut the ECB's Germanled group of hawks, who cite M3 growth as the chief justification for pushing rates into "restrictive territory" arguably 4.25pc, or above.
Stephen Lewis, strategist at Insinger de Beaufort, said the M3 dispute masked a political battle for control over Europe's economic policy.
"The Bank of France is looking for arguments to temper rising rates going forward. We're nearing the limits of consensus," he said.
Mr Trichet insisted yesterday that there were "no divisions" on the ECB's governing council.
Adding to tensions, President Sarkozy's plans for a fiscal "growth shock" are putting Paris on a collision course with Brussels and Berlin. His tax cuts have been slammed by French economists as shortterm pumppriming that will add ( to the budget deficit, and breach the EU's limit of 3pc of GDP.
Elie Cohen, director of the research group CNRS, said it was all "demand" stimulus. "I don't see anything that addresses the real problems of the country, such as the collapse of competitiveness. We've lost 20pc of our market in six years," he said.