Cosmetic Confidence

Superficially all is suddenly fine and dandy for the core European economies.

The signals coming from Joaquin Almunia, the EU economic and monetary affairs commissioner, and Jean-Claude Trichet, the president of the European Central Bank, are of a reasonable economic recovery becoming more broadly based.

This theme has been taken up by a number of analysts, such as Simon Derrick of the Bank of New York office in London, who was quoted in the International herald Tribune today as saying: "Life is pretty decent right now in Europe, and European officials feel pretty positive about the economy despite the rising euro. There has been a considerable shift in viewpoints."

Well, yes and no. Before we get to the no, let us just note that even amid the new found optimism, Almunia has said: "Growing at, or slightly above, potential is not enough and some countries are far from exploiting their full potential."

Only when they do will the unemployment rate come down further, he warned.

Trichet for his part talks of "strong and steady growth", but reminded us after the monthly meeting of central bankers in Basle just how obsessed they all are with the possibility of an acceleration in inflation.

The central banks keep looking for so-called "second round effects" of the rise in the price of energy, but once again Trichet conceded yesterday that so far there had been little sign of such effects.

What they mean by second round effects is a successful attempt by wage bargainers to gain compensation for the cost of living loss from higher oil prices by securing larger than usual wage awards.

But this fear is a hangover from the very different world of the 1970s and the first oil shock, when a spiral of inflation was indeed set off by such wage demands. These days competitive forces in the world are much more intense - one only has to mention China - and the power of trades unions is considerably weaker.

The point about the central bankers' obsession, and that of the ECB in particular, is that this fear of second round effects makes them much less willing to accommodate an economic recovery that is only just coming into its own.

Moreover the recovery has been heavily dependent on exports, and the revival of confidence among consumers - much heralded in the latest EU surveys - is fragile and could easily be arrested by pre-emptive action by policy makers.

Which brings us to the no. Recently there was a gathering of the top eurozone policymakers and other key officials. My information is that a lot more concern was expressed about the implications of the strength of the euro vis-a-vis the dollar for the eurozone's economic recovery than is generally realised.

Just because Trichet has made no recent public reference to any dangers to European competitiveness from the rising euro - as opposed to his concerns a couple of years ago - some analysts appear to have concluded that this time it's different.

But my understanding is that behind the scenes, European policymakers are very concerned indeed about what a continued rise in the euro might do to the present economic recovery.

One senior official present at the recent gathering asked whether the assembled company had a Plan B to deal with a potential crisis on this front. My source tells me there was no sign of such a plan.

· William Keegan is the Observer's senior economics commentator