Is there a correlation between the introduction of the common European currency in 12 EU countries some years ago and the more recent real estate market boom in some of them? According to the European Central Bank (ECB) there is such correlation. The top bankers see this as dangerous inflation pressure and hope by increasing the main interest rates to curb it to more tolerable levels. But are they aiming at the right target? Are they sure this inflation is such an intolerable danger that it should be faced immediately or the Eurozone economy will 'overheat'?

At first sight there is a strong correlation between the introduction of the Euro in 2002, although the official exchange rates were definitively set in 1999, and the recent real estate boom in many Eurozone countries. This fact, however, hides broader trends similar to what we are seeing in North America, where the influence of the Euro is close to nothing. By the same trends we mean the burst of the 'new economy' bubble in 2000 and the need to orient the major investment flows in different direction. On both sides of the Atlantic the 'new economy' burst in 2000 led to historically low main interest rates, so the real estate boom wasn't such a surprise after all. This parallel shows that even without the introduction of the Euro we still would have been witnessing some real estate boom.

The facts show that the EU countries that opted-out from the Eurozone are performing the same way, some even better in terms of property appreciations, e.g. UK. Other EU countries that still hope to join the Eurozone in the future, like Cyprus or some countries from Central Europe, are also booming faster than the Eurozone in average. On the other hand, the biggest EU and Eurozone country Germany is experiencing real estate depression despite the fact that the average prices there are lower than in the neighboring France. Last, but not least, the real estate boom doesn't lead to vicious circle of general goods and services inflation. There is certainly something wrong with the model that makes the Euro the main culprit for the recent real estate boom in many Eurozone states. And if it isn't the main reason, then what we should expect from the ECB main interest rates increases?

These increases will depress the general economic activity, but won't necessary depress the real estate market in a way desired by the top ECB bankers. Investments should still have to go somewhere, and if the general economic situation is bad or worse then the real estate may still remain a good source for capital gains. This economic depression will be stronger in countries that already have low or nil rates of economic development like Germany. Other countries that enjoy increased international interest like Greece, Ireland and Spain will perhaps remain largely unaffected. Countries with good real estate performance but bad general economic performance like Italy may feel some additional incentive to opt-out from the Eurozone. It may turn out that the ECB instead of cooling down the real state market will make the Euro itself less attractive as a currency for some of its members.

The Eurozone passes a very difficult period. The different levels of economic development and the different price levels make many Eurozone countries unhappy whatever the decisions of the ECB are. Unlike the United States where the dollar is deeply embedded in the national mentality, in Europe many people while shopping still double count in Euro and in their former national currencies. If the Euro is able to pass this difficult period of gradual mentality transformation, it will last. If the ECB by financial zeal decides to push to the limits of its power and acts like the U.S. Federal Reserve System, then it may face strong national backlash. It may even face a situation when this backlash may lead to Euro collapse in one or another country. Is it worth after all risking the Euro by trying to cool down the real estate in Europe?

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