This is an outstanding must-read article by think-tank Bruegel. The seven authors are leading economists, many based in Germany. The article explores two fundamental questions. Firstly, what would happen if the ECB failed to respond to the excessively low inflation and the weak economy? Secondly, what economic policy would be suitable under the current circumstances, if not monetary policy?
Well written and carefully argued, the authors make a powerful case. But fundamentally, there is nothing new here.
The crux of the crisis emanates from the conservative economic policy of the German government. Germany has lectured Southern Europe endlessly about living within their means. The Fiscal Compact to support the Euro has not caused the expected convergence. Germany has consistently refused to reflate her economy and encourage infrastructure investment. Meanwhile, France has flouted the rules of the Fiscal Compact year after year. Radical policy from the ECB has stopped the Eurozone from spiralling downwards into a deep depression. But German has consistently been putting road-blocks in front of ECB policy.
It’s not new but what is required is a belt and braces approach, loosening both monetary and fiscal policy across the Eurozone. Monetary policy is the preserve of the ECB and it has already been bold, so perhaps now it needs to be radical? As for fiscal policy, this has been trapped by the Fiscal Constraint, ruthlessly applied to smaller countries Southern European countries by both the ECB and Germany.
The other important factor is to consider the wider political context and its likely direction over time. Everywhere right wing populists, like Le Pen, are on the rise. If the UK votes for Brexit, the coming elections in France and Germany could be pivotal to radical change. Rather than increased centralization of power, we could quickly witness the risk of accelerated dismantling of EU institutions.