Sir, In light of the recent rapid run-up in international oil prices, one has to wonder whether Wolfgang Munchau goes far enough in his call for a basic economic policy overhaul to revitalize Europe's sluggish economy ("How to dig the eurozone out of its hole", August 8). Over the past year, not only have spot international oil prices increased by Dollars 20 a barrel, but long-dated future prices have increased by a similar amount. At over Dollars 60 a barrel, these long-dated future prices suggest that currently high oil prices are unlikely to be a passing phenomenon.

International Monetary Fund estimates suggest a sustained Dollars 20 a barrel increase in international oil prices reduces European economic growth by over 1 percentage point and adds over 1 percentage point to Europe's headline inflation rate. This will almost certainly mean that the European Central Bank will miss its inflation target in the second half of this year, notwithstanding Mr. Munchau's assertion to the contrary. With oil prices so high, the half-point cut in ECB interest rates he suggests would seem inadequate to the task of spurring the European economy. Instead what would appear to be needed would be to have the ECB target core rather than headline inflation. One might also want the ECB to move away from its single inflation target to a Federal Reserve-style monetary policy that in addition to inflation took into consideration output and employment growth developments.

For similar reasons, one would want to redefine the European fiscal stability pact in terms of cyclically adjusted rather than actual budget targets. Failure to do so runs the risk of having fiscal policy amplify the negative economic effects on the European economy of the current oil price shock.

Desmond Lachman is a resident fellow at AEI.