A weak currency and a rising oil price should not lead to over-tightening of monetary policy in the euro-zone

One of the absurd habits of populist democracy is to blame the national government for everything that goes wrong in the world, and to expect that government to be able to cure the trouble painlessly. In no country is this habit further developed than in France, which makes the French reputation for logical thinking amazing. The government of that country consists of autocracy punctuated by outbreaks of mob rule.

Unfortunately, bad habits spread. Truckers and farmers in other countries have been quick to emulate their French confreres who forced their own government into a humiliating surrender. The pressure on world oil markets stems from a belief that Opec undertakings to increase production will not be sufficient; and that, even if they were, refinery capacity in developed countries is insufficient to process the extra oil at all quickly.

The French reaction was particularly bizarre as duties and taxes are a smaller proportion of the final petrol price in France than in the UK. In any case, nothing would constitute a more absurd reaction to the periodic scares about energy prices than a cut in duties.

There is a strong case for raising the final price paid by consumers of fossil fuels. Whether one is thinking of security of supply, global warming, reducing pollution, or all the other reasons given by Andrew Oswald on this page on Wednesday, the arguments are for adding to the price, rather than reducing it artificially.

The British government has characteristically promised not to give in to street protests. The self-perpetuating petrol panic was due to a large extent to tanker drivers becoming reluctant to move supplies in the face of demonstrators, and oil companies all too happy to see popular indignation deflected towards the government.

But mass picketing by farmers or truckers is no more edifying than the flying pickets sent out by Arthur Scargill, president of the National Union of Mineworkers, in the 1984-85 coal strike.

Tony Blair at last seems to be reacting in the spirit of that good liberal Gladstone, who remarked after the Phoenix Park murders in Dublin, that "the resources of civilisation are not at an end". The central issue here is constitutional government rather than economics. The economic influences are similar to those behind the oil price explosions of 1973 and 1979. Opec has got its act together at the same time as rising world activity is pushing up the market price in any case.

Nevertheless, the problem is much smaller now. Real oil prices are much lower and the amount of oil required to produce a unit of output has fallen by nearly a half in the European Union.

Unfortunately we cannot leave the matter there. One of Karl Marx's wiser utterances was that history repeats itself first as tragedy and then as farce. The farce could become more serious. For one change compared with past episodes is the lower tolerance of oil consuming countries for inflation. There is always a danger of this lower tolerance spilling over into policy fanaticism.

The ugly word stagflation was invented to describe the occurence of inflation plus economic stagnation following the first oil crisis. Countries such as Germany then reacted to the inflation part of the dilemma by keeping their monetary policy tight, while the English-speaking countries vainly tried to stem the recessionary part by boosting spending power.

The lessons were endlessly debated by policy advisers, particularly at the Organisation for Economic Co-operation and Development. The conclusion was that governments should "accommodate" the knock-on impact of a supply shock, such as that coming from oil. To try to roll back other prices in compensation would be too depressive. At the same time, governments should be particularly careful not to accommodate any secondary effects that would engender a cycle of higher inflationary expectations.

This conclusion remains valid. But while the danger in the 1970s was more that of permissive policies, the greater danger now is that of mistaken attempts at roll-back. The danger is probably least in the US where the Federal Reserve has a lot of discretion to make commonsense adjustments. It is probably not great in the UK, where the chancellor's instructions to the Bank of England say that temporary breaches of the inflation target will have to be explained by the Bank.

The danger is greatest in the euro-zone, where the European Central Bank has a mandate to pursue price stability, which it interprets as an inflation rate of between 0 and 2 per cent. The temptation to over-react is increased by the weakness of the euro, which has in turn been aggravated by the euro-zone's dependence on imported oil.

The speech by Wim Duisenberg, president of the ECB, this Tuesday to the European Parliament's monetary committee was exemplary. He explained that the 2.4 per cent annual rate of consumer price inflation in the Euro 11 mainly reflected the impact of oil prices and the depreciation of the euro. Monetary policy could not offset such short-term pressures. But it had to ensure that such "temporary deviations . . . do not spill over into long inflation expectations". In particular, any attempt to recoup in wages the terms of trade deterioration brought about by higher oil prices would be met by monetary tightening.

The sentiments are entirely in line with the OECD doctrine. Nevertheless, his interpretation is not widely appreciated, and market participants and commentators tend to interpret the inflation objective in term of a crude reading of the year-on-year consumer price increase.

Predictably, a fierce dispute has broken out among bystanders between "hawks" who want to tighten policy to bring price increases back within the zero to 2 per cent range as soon as possible, and "doves" who would like them euro-zone to emulate the US and "go for growth".

The best policy would be to do neither of these, and still less to follow the chimera of foreign exchange market intervention. It is instead to continue "benign neglect" both of the external value of the euro, and also of the knock-on impact of higher oil prices. As anything that can be misunderstood will be misunderstood, I hasten to add that, to the extent that a persistently weak euro feeds into underlying inflation level, this must be taken into account. But so far there is little sign of it.

This would be the wrong time psychologically to refine the inflation objectives of the ECB, especially if it involves introducing qualifications and exceptions. The way ahead should simply be to carry out the OECD recommendations of the 1970s and to explain what has been done when the foreign exchange and oil markets have cooled down.