The European Central Bank (ECB) today defied the threat of recession in many eurozone countries and raised interest rates to their highest level for almost seven years, despite frantic political pressure.

ECB President, Jean-Claude Trichet, issued a strong warning on Wednesday that inflation in the zone could explode if left unchecked.

The decision by the ECB’s Governing Council is set against calls to hold firm from European leaders led by President Sarkozy of France. It comes after a leap in eurozone inflation to 4pc in June which set alarm bells ringing over price pressures. This was further fuelled by a rise in factory-gate producer prices within the eurozone, which jumped 1.7pc in May, to stand 7.1pc up on a year earlier. The hike was largely driven by an 18.2pc year-on-year rise in energy costs.

More depressing numbers were released today confirming that the eurozone’s services sector, which is at the heart of its economy, shrank in June for the first time since mid-2003.

Economists pointed out new indications of “stagflation” in the eurozone economy, with output contracting as price pressures continue to build. They believe that today’s interest rate increase is a single-shot for the rest of the year.

Could that be more in hope than expectation though?

A version of this article appeared in Syntagma recently.

As we predicted here, this credit crunch cum downturn cum recession cum slump cum … was always going to happen in slow motion. That’s because of the normal lags involved in the transfer of economic conditions between countries and continents. Britain is said to be around nine months to a year behind America.

While the U.S. downturn started at the back end of last summer, it’s only now starting to decimate the British economy and parts of the eurozone. If we want to know how bad it’s going to get, we only need to peer across the Pond.

Gold rushes come and go in the world’s innovation capital, California. But when they go … they really go.

The City of Vallejo in California has filed for Chapter 9 bankruptcy, making history it seems. Half Moon Bay, home to some internet digerati, may well be next. According to John Moorlach, Orange County board chief, “This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California.”

What can it mean to people on the ground when their city goes belly up? What of their assets, houses etcetera? It will be interesting to watch this pan out.

According to Goldman Sachs and Lehman Brothers American house prices are likely to fall 25pc from peak to trough. With between 10m and 12m households in negative equity already, there’s still a way to go.

Shares across the developed world are set for big falls too. Albert Edward Société Générale’s global strategist says, “Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios. We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that ‘the worst might be over’ is truly staggering. Profits are disintegrating.”

Ambrose Evans Pritchard of the Telegraph (UK) — ever the Cassandra (rightly so, in my view) — says pointedly, “Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.”

The Bank of England and the European Central Bank are still stubbornly refusing to cut rates because of inflation fears, which will be the least of our miseries in the next two years and should abate soon as global demand falls off the much-imagined cliff.

It’s probably true that Ben Bernanke’s Federal Reserve has saved the U.S. and other countries from another Great Depression. But nothing can stop a slump now because it’s already happening.

One of the (almost) hidden treasures of British journalism is Ambrose Evans Pritchard in the The Telegraph. I say hidden because some of his best stuff is tucked away on his Telegraph blog.

Take this article on the deeply unhappy euro currency area:

“… the last decade has shown once again — if such a demonstration were necessary — that Britain’s rumbustious, credit-driven, Mid-Atlantic economy is incompatible with the economy of Greater “Carolingian” Germany [Germany, Netherlands, Belgium, Luxembourg, Denmark, and France above the Loire]. The UK cycle is at least a year ahead. The trade and capital flows are more intertwined with the dollar zone.”

As Neil Mellor from the Bank of New York Mellon points out, the pound has been perfectly hedged in this cycle. Sterling has fallen hard against the euro, giving a shot in the arm to British manufacturers (yes, they still exist, 13pc of GDP) who rely heavily on Europe’s markets: yet it remains overvalued against the dollar, softening the effect of oil, metal, and commodity inflation.

Read the whole article.