ECON430-Topic #4: Europe and Monetary Policy

The ECB was modeled after the German Bundesbank in that the central bank goal is to follow a rule that only targets inflation. However, there are many who are now trying to alter central bank rules so that they can help aid countries such as Greece, Ireland, Portugal, Spain and Italy. The ECB has been conducting bond purchases in recent months aimed at helping these ailing countries, but the purchases have been sterilized through facilities which drain liquidity from the system. Bond purchases in the euro-area have been sterilized unlike in the U.S. where bond purchases have been conducted and expanded the Fed’s balance sheet.

The danger of stopping sterilization is the German’s fear of runaway inflation. However the alternative might be very costly as well. If the ECB does not do additional intervention, there is a looming threat that the euro might fall apart. There is no plan in place for any country to leave the euro, and a disorderly unwinding might lead to widespread bank runs as either all the rich or poor countries abandon the common currency. The ECB has been running a stabilization fund that is hoped to help keep the euro from collapsing, but there are fears that the fund is not large or stable enough to actually help in the medium to long run.

Questions you might answer:

  • Do you believe the ECB should stick to its strict goal of inflation targeting, or should they also consider trying to reach full employment across the euro zone.
  • Should we just allow the euro to collapse? If these countries put themselves in this situation, what reason can you think of for either bailing them out or not? Are they solely to blame for the overspending on real estate and government programs? Or do surplus countries like Germany share the blame? Does the possibility of forcing debtor countries to work and repay their debts in the long run have any potential consequences?
  • What problems might arise if the ECB dropped their strict inflation target? Are we guaranteed to experience runaway inflation?

17 thoughts on “ECON430-Topic #4: Europe and Monetary Policy”

  1. I think that the European situation has a reached a point where the ECB needs to set aside its policy on strictly controlling inflation and take the necessary action to stabilize the EU. One of those actions should be to for the allowed expansion of the ECB’s balance sheet and forget about trying to sterilize bond purchases. The ECB already allows banks to borrow as much money as they would like at the set rate, so banks are essentially dictating the supply of money in the system anyways (1). However, inflation has proven to be an issue for the EU, with the anticipated 2011 inflation projected to be around 2.6%, above its target of less than 2% (2). This risk of runaway inflation must certainly be considered.

    It is necessary for the ECB to take further action because the breakup of the EU would have devastating global consequences. If the EU were to collapse, there would be widespread corporate defaults, the collapse of international trade, and the need for massive bank recapitalizations that would shock the global economy (3). Some sort of fiscal union needs to be meet on the grounds of budget discipline for countries that have shown their fiscal irresponsibility. We must wait and see what comes from the two day talks that begin in Brussels tomorrow and the summit on December 9th, but until then we can watch as trillions of dollars of U.S market cap disappears so that the people of Europe can ensure long holidays and extra tea time.

    (1) http://www.businessweek.com/news/2011-11-30/euro-ministers-bid-for-bigger-imf-role-as-fund-falls-short.html
    (2) http://www.businessweek.com/news/2011-11-16/europe-inflation-holds-at-3-year-high-complicating-ecb-task.html
    (3) http://www.zerohedge.com/news/bring-out-your-dead-ubs-quantifies-costs-euro-break-warns-collapse-banking-system-and-civil-war

  2. The modern currency union forged in 1998 known as the Eurozone was ill conceived. Currently, the ECB’s only mandate is an inflation target, resulting in an interest rate policy that that is too high for some nations and too low for others. This produces unbalanced results across the member nations, leading some to experience bubbles and others persistently high unemployment and low output. In addition, factors that benefiting currency unions such as geographic worker mobility and similar (if not the same) languages do not exist within the Eurozone (1).

    Questions persist on whether or not the euro should be allowed to continue. A few pertinent points endure. First, the ECB has no serious conflict resolution mechanism. The apparent arguing among nations has led world markets to be dragged along a painful path of uncertainty and risk regarding the future of the euro, a situation that does not appear to be going away any time soon (1). Second, failure of nations to abide by the Growth and Stability Pact rules such as annual budget deficits not exceeding 3% results in nothing more than a slap on the wrist (e.g. Greece). Rules that cannot or will not be enforced are not rules at all (2). Third, current dollar liquidity swap arrangements by the ECB and the FED have the potential to drag the U.S. economy directly into the euro mess. While the potential that the FED will not be repaid is low, it still exists and is not risk-free (3).

    Interest rate policy will continue to be sub-par for member nations. In addition, the increasing addition of political decision making into the calculus of the ECB has the potential to pollute ECB actions and perpetually drag world markets down. It’s best for the euro to be allowed to end.

    References:

    (1) http://www.time.com/time/world/article/0,8599,2100059,00.html
    (2) http://wallstreetpit.com/46877-eurozone-reform-not-yet-fiscal-discipline-but-a-good-start
    (3) http://seekingalpha.com/article/311431-the-fed-makes-sure-u-s-dollar-collapses-with-the-eurozone

  3. Margaret Thatcher once said, “The problem with socialism is that you eventually run out of other people’s money.” That’s a fairly accurate description of the current situation in some of the European countries, such as Greece and Spain. In the name of distributional socialism, European governments have borrowed and spent their economies into oblivion. There comes a time when creditors are no longer willing to fund irresponsible governments.
    The only way to solve a sovereign debt crisis is through massive spending cuts.

    A budget deficit is really a symptom of a spending problem. The euro can be saved if the PIIG countries immediately slash spending, turning their budgets deficits into a surplus, allowing them to pay off debt to their creditors. Countries such as Canada and Estonia have solved their fiscal crises through spending reductions, rather than tax increases or debt monetization. (1)

    Bailing out the PIIG countries through the ECB or IMF will not solve a long-term fiscal crisis. That’s the equivalent of short-term gain for long-term pain. Any sort of rescue package will only encourage future deficits and spending. Reducing the debt burden by cutting spending is the only way to solve this problem. Sometimes medicine taste bad, but you have to swallow it.

    Inflation in the European Union is already at a three year high, running around 3 %, which is above their target of 2%.( 2) The ECB should continue their policy of inflation targeting, which means they should not print money to buy sovereign debt. Again, debt monetization is basically a subsidy for profligate welfare states. Encouraging and rewarding bad behavior is bad economics.

    There’s really no easy solution to Europe, more or less, they’re damned if they do, damned if they don’t.

    1. http://danieljmitchell.wordpress.com/2011/05/10/lets-copy-the-baltic-nations-and-really-cut-spending/
    2. http://www.marketwatch.com/story/euro-zone-inflation-rate-steady-above-ecb-target-2011-11-30

  4. I think it will be a good idea if world super economies countries come together and help to rescue the euro because letting it fail and allow some of these countries with high debts to default it will pose a threat to the rest of the Eurozone and the single countries currency themselves. And if it reaches to the point where euro collapses, it would have big consequences for the rest of the world’s markets and the global economy in general.
    Sitting down and blame these countries has being irresponsible we will be making the big mistake because at the first place these debts have to have come from somewhere they did not just created by the banks or countries in question. Country like Germany should indeed share the blame for its reckless lending to these countries like Greece, Portugal, Ireland, Italy and Spain who are now in big threat of debt default.
    If big Eurozone countries like Italy did default and caused a spread of debt default throughout the Eurozone and European banks, then there could be potential for Euro to fall significantly so by forcing these debtor countries to repay their debt in the long run it would be very helpful because we would be able to avoid the fall and return the confidence of investors through reducing the bank runs in the Eurozone.

    http://seekingalpha.com/article/309419-germany-is-also-to-blame-in-the-euro-crisis

    http://www.moneyweek.com/eurozone-debt-crisis

    http://www.time.com/time/world/article/0,8599,2095670,00.html

  5. The sustainably leveraged members of the Eurozone (aka, Germany) need to look seriously at the costs and benefits of maintaining as inclusive a currency union as exists today. On the benefits side of the ledger, the Euro allows for easy and abundant cross border investment and trade flows by eliminating shoe leather costs associated with obtaining foreign exchange for trade/investment purposes, as well as eliminating currency risk faced by European investors. Germany, Europe’s prominent exporter, will want to take this into account. On the other hand, the Euro imposes costs on Germany. To maintain the union, it will likely need to help out heavily indebted, recession prone countries by accommodating easier monetary policy as well as providing fiscal assistance in the form of bailouts. Easy monetary policy will erode German savings and asset values as the Euro devalues, a politically unpopular move among most Germans.

    If the Germans (and other wealthy European countries) truly think the benefits associated with the Euro outweigh the costs of potential inflation and continued bailouts, then by all means they ought to continue with the Euro, engage in aggressive monetary easing, and do all they can to help their worse-off partners succeed. If not, they should help coordinate the orderly exit of the heavily indebted countries, standing ready to recapitalize their banks which will certainly take a hit as formerly euro-denominated assets are repaid with rapidly-devaluing drachma, lira, and pesos. Either way, they ought to make their choice soon and eliminate some of the uncertainty facing global markets.

    http://www.foxnews.com/opinion/2011/11/28/germany-and-france-should-help-italy-and-others-leave-euro-behind/
    http://www.theglobeandmail.com/news/world/stephen-lewis-on-greeces-budget-woes/article2210067/
    Eudy, Gwen. Why is Europe Forming a Monetary Union? Federal Reserve Bank of Philadelphia Business Review, November 1998.

  6. For the Euro to survive, the ECB’s role and monetary policy tools need to change. The policy of strict inflation targeting , put in place because of inflationary environments within Europe, has worked in the past but can no longer be the ECB’s only mandate. This kind of crisis, involving several large and small countries sovereign debt has never been so large or so intertwined. Because of these close relationships between euro banks and euro countries, the threat of contagion could bring them all down. That is why bond prices in Italy can effect bank lending in France.
    A way to address the crisis is to allow the ECB to go out and purchase euro countries debt, which is essentially quantitative easing. This is done by purchasing bonds at certain prices keeping the yields on these bonds stable as well as manageable to the bond sellers. This outright purchase of the bond does 2 things, it increases the balance sheet of the ECB and also increases liquidity in the banking system. This extra liquidity then spurs lending by the banks, which in turn increases GDP. (1). The main opponent to quantitative easy is Germany who fears that the increase in liquidity would automatically increase inflation (2). However this policy has been employed by the Fed for the past 3 years with no sign of increased inflation although fears about this policy persist (3).
    Another reason for quantitative easing is Europe is thought to be entering a recession which could make budget cuts incredibly difficult to implement. If the ECB is allowed to expand its balance sheet, which in turn would increase liquidity, a recession may be averted. This gives more time for countries to evaluate which budget cuts are necessary and which ones should not be implemented for fear of harming future growth.

    1.) http://blogs.wsj.com/economics/2011/12/01/ecb-quantitative-easing-could-aid-europe-research-suggests/?KEYWORDS=ECB
    2.) http://blogs.wsj.com/economics/2011/11/29/what-does-ecb-sterilization-miss-mean/?KEYWORDS=quantitative+easing+inflation
    3.) http://www.bls.gov/news.release/cpi.nr0.htm

  7. I believe that it’s time to take the reins off the ECB and allow them the right to conduct activist monetary policy similar to our Federal Reserve. Top European leaders are in discussion right now regarding the EU contract, and the option for the ECB to target the employment level should be a focus of this meeting along with budget coordination. The constraints placed on the ECB by current European Union regulation does not allow for effective policy in times of crisis. Though the European Union might be considered an optimal currency zone by many, the diverging political regimes under one central bank would fare better under a policy that allows for swift adjustment rather than one that blindly targets an inflation number.

    An announcement by Eurostat on Nov 30 indicates that inflation in October remains at around 3%, above the 2% target. Despite these numbers, recent surveys indicate that European manufacturers do not plan on raising their prices within the next 12 months. This should dampen fears of inflation, and suggest that the strict inflation targeting policy of the ECB is unnecessary. An increase in the authority of the ECB to conduct more monetary policy will not cause hyperinflation. On the contrary it should rejuvenate investor confidence in the Euro-zone and be a seminal step in rebuilding Europe’s economy.

    References:
    http://www.marketwatch.com/story/euro-zone-inflation-rate-steady-above-ecb-target-2011-11-30
    http://www.bloomberg.com/news/2011-12-05/merkel-sarkozy-unite-on-eu-rewrite-as-week-of-truth-begins.html

  8. In my opinion, ECB should not stick to its strict goal of inflation targeting. The ECB’s main priority is to maintain stable economy in the Eurozone countries. The inflation targeted at 2% defined the price stability in the Euro zone, but it has been difficult to keep the rate at 2%. The global imbalances in demand and supply of commodities, made it hard for the ECB to maintain their inflation rates below or close to a 2% rate. According to Hannon, the inflation target rate has been close to 3% for almost three years (1). This is not a good indicator of the stable economy. The price stability definition needs to be rewritten, as 2% inflation targeting seems to be too ambitious and not realistic.

    Europe has made a choice to not allow European Union members to default on their debt. The massive default on debt could weaken the economy. According to James Saft, quantitative easing implemented in Euro zone is beneficial to fight the breakup of the euro zone (2).

    A full-employment economy creates more confidence and optimism and thus makes structural reform politically more acceptable. In the article “Making EMU a Success”, Dornbush suggests couple strategies on how to have balanced budget and full employment. 1. The Joint European action together with a reinterpretation of the stability and growth pact to accommodate deficit reduction over time. 2. A cooperative, potential-output based monetary policy aiming at low interest rates. (3)

    1. http://www.marketwatch.com/story/euro-zone-inflation-rate-steady-above-ecb-target-2011-11-30
    2. http://blogs.reuters.com/james-saft/2010/12/02/waiting-for-europes-qe-to-sail/
    3. http://poleco.info/IMG/pdf/Uem.pdf

  9. The major issue with the ECB not helping countries such as Greece, Ireland, Portugal, Pain and Italy through quantitative easing is that all the other countries under the Euro are harmed as well. Another issue is that the ECB has no exit strategy. They never thought this problem would arise and cannot tell countries to switch to a new currency or a solution to the problem. It took 2 years to fully start issuing Euro’s and with the current situation there is not enough time to effortlessly switch. The two options the ECB is faced with are to bail the countries out or let them fail. Bailing out one country means then the ECB is looked at to bail out all countries in need leading to countries not being as cautions at making investments thinking they will be bailed out if those investments fail. The ECB does not want the countries to fail as it harms those that are not in the wrong. The major factor in the ECB helping any country is Germany as majority of Germans believe that the central bank should focus on targeting interest rates and no other policies should be implemented that could potentially harm the interest rate. Since Germany has a permanent vote in all policies from the ECB as the Bundesbank president sits on the Council it is hard to pass policies that Germany does not believe are going to help the Euro as a whole (2)The other problem with this is as Ed Yardeni pointed out Bernanke is worried about the European sovereign debt crisis (1). Bernanke will most likely help as much as he can to prevent the downfall of the Euro as that could crash the markets causing the United States to be in another economic crisis. Bernanke also feels that because of the United States recession the European crisis arose (1).

    1. http://articles.businessinsider.com/2011-11-21/markets/30424452_1_european-central-bank-global-economy-great-depression-ii
    2. http://www.bundesbank.de/50jahre/50jahre

  10. European Union survival is at stake when we talk about the debt crisis and possible solutions to the banking disaster. The ECB’s role in the marketplace with respect to monetary policy needs to adapt to poor market conditions developed across a spectrum of downgrades and decreased market stability. The ECB argues its bond sterilization purchase program insulates itself from the FX market to curb the effects of a changing monetary base (i.e. inflation), but banks are failing to do just that. The banks most recent failure to sterilize all of its bond purchases left an additional €9.3 billion of liquidity in the market. This was primarily due to the banking system denying the central banks offer of short term interest rate deposits at auctions. If banks have decided to keep their money elsewhere, inflation will remain an issue, thus impairing the banks’ ability to manage monetary policy in the first place. While I admit the bond sterilization program should be eliminated as it will hurt the perceptions of the effectiveness of ECB policy, with a projected inflation in 2011 of 2.6% (60 basis points above its target), the issue of hyperinflation should be considered.

    With €9.3 billion of liquidity flushed into the markets, the ECB has already conducted a quantitative easing practice. The error has been labeled as a “technical error”, but leaves room to question a move toward accepting quantitative easing. While the easing led to a weaker euro and positive implications to risky assets, confidence in ECB policy is at stake. Another “accidental easing” will most likely help the economy in the short run, but it will have negative effects on its ability to control the economy in the long run. If investors neglect to believe the central banks proposed actions, policy itself will deem ineffective, which will in-turn lead to a financial collapse. This is why the bank needs to adopt a dual mandate policy that is transparent to the public, so the public reacts accordingly to quantitative easing and central bank credibility is held undamaged. The elongated European debt crisis is destroying global economies (including the United States market) and having a profound effect on the job market around the world. I would like to think Sarkozy and Merkel could fix this crisis before extinguishing the US market capitalization too much, as a job upon graduation would be nice.

    1. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBJp_FWQ6wIc

    2. http://blogs.wsj.com/source/2011/11/30/ecb-needs-to-check-its-oil-leak-over-bond-purchase-sterilization/?mod=google_news_blog

    3. http://blogs.marketwatch.com/thetell/2011/11/29/ecb-move-hints-at-quantitative-easing/

  11. First of all, I do not believe the ECB to be at fault for the present crisis in Europe. A French newspaper, Le Monde, believes (as do I) that if it was not for the member states allowing their debt to grow out of hand and the other states for not understanding the nature of the crisis then they would not be in the crisis they are now. (1) That being said, I do not think that the ECB should abandon its strict inflation target. Germany, who is a big inflation hawk, understands, because of their history, the effects that rampant inflation can have on a country or countries. If hyperinflation did occur in the Euro-zone then it would essentially render the Euro useless, which unfortunately could happen if the Euro-zone breaks apart. So there seems to be a catch-22 of sorts.
    The question does not have to be if the ECB should target something in addition to inflation, but what else can they do with their present mandate. One possible system would be to adopt a two-currency system which could last a short or long period of time. Europe has already had something like this with the bimetallic standard of gold and silver from back in the 1870’s. (2) It could set the current Euro as the “strong euro” and create a “weak euro.” The ECB could control both and still keep its mandate with the strong euro. The weak euro would be adopted by the debt-ridden countries (with the exception of their bonds and external debt which would remain in strong euros) so that the ECB could devalue the weak euro for those countries to regain a competitiveness against their trading partners. (3) It is important to note that since the debt remained in strong euro denominations that the confidence in those countries to repay would not decrease. This two currency system would be maintained until all the countries with the weak euro attained and sustained real convergence with countries denominated in the strong euro.
    A major issue with why the ECB does not want to change its mandate or for Greece or other countries to default is a fear for a lack of Confidence. Weidmann said that there is no way to gain confidence if the ECB “oversteps its mandate.” (4) And obviously confidence in Greece would be lost if they defaulted on their debt, and not just confidence in Greece but confidence in the Euro. Once confidence in the Euro is lost then the Euro-zone will most likely be forced to split.

    (1) http://www.eurointelligence.com/eurointelligence-news/archive/single-view/article/after-stark.html
    (2) http://www.firstpost.com/world/euro-crisis-can-be-fixed-with-a-two-currency-system-122233.html
    (3) http://www.economonitor.com/blog/2010/02/the-option-of-last-resort-a-two-currency-emu/
    (4) http://www.reuters.com/article/2011/11/19/ecb-weidmann-idUSL5E7MJ02620111119

  12. There could be unfavorable long term consequences if the ECB decided to drop their strict inflation target. The ECB decided to strive toward maintaining an inflation rate at 2 percent because this is what they believed would provide the best economic performance in the long run. Having an inflation target does not provide flexibility in the short run since the central bank is unable to pump money into the economy to jump start it. But breaking from the inflation target would raise inflation expectations which would make businesses less likely to invest more in the future which will lower economic growth in the long run(1). As ECB president notes it is worth it to rough it out in the short run as the European economy will recover at a “moderate pace”(2).

    Right now the European Union is a broken system but what is needed is more reform to Europe’s fiscal structures. It is unfair to European countries to have a unifying currency but different tax laws for each individual country. Countries with lower tax bases in the EU become a lot more appealing to businesses and more economic growth.

    We are not guaranteed to see runaway inflation if the ECB decided to increase bond purchases. We have yet to see any immense inflation here in the United States after the Federal Reserve performed two rounds of quantitative easing because US banks have chosen to greatly expand their excess reserves after fearing a run on the bank(3). The same situation would most likely occur in Europe with their current debt crisis.

    1) http://research.stlouisfed.org/publications/mt/20051201/cover.pdf
    2) http://www.bloomberg.com/news/2010-10-16/trichet-says-euro-region-needs-more-ambitious-rules-to-keep-fiscal-rigor.html
    3) http://www.forbes.com/sites/bobmcteer/2011/11/25/needed-ecb-bond-purchases-without-sterilization/

  13. No matter how you look at the eurozone, at least a few countries are going to have to bite a hard bullet. Tough consequences are approaching and there still is no sound or viable plan emerging to solve the debt crisis and by the end of this week, all eurozone members will have their credit ratings slashed if they don’t come up with something awesome [1]. Fortune article contributor Cyrus Sanati suggests that unless the ECB “pony’s up” to become a real lender of last resort, not even the Germany/France compact plan will hold any water. Sanati suggests that the alternative to the ECB becoming a lender of last resort is a true fiscal union that would pool tax receipts and debt among all eurozone members. The resulting redistribution of taxes and debts would create a “harmonization of spending policies.” The latter idea I just don’t see happening. But if the ECB did become this official lender of last resort, then there would be some progress in alleviating the issues of sterilization and liquidity drains. The ECB would then be able to print money or buy up bonds to buy and support the debt of struggling members. But, obviously, inflationary consequences are worrisome. Nowotny comments, “The greatest challenge we now face to prevent is that this crisis doesn’t lead to another markets crisis,”[2]. Given that Germany is the biggest economy in Europe, they do have a fairly legitimate say in rejecting any moves that would boost inflation. For lack of any real emerging solution, I won’t be surprised to see that S&P downgrade by the end of this week.

    [1] http://finance.fortune.cnn.com/2011/12/06/standard-poors-eurozone-downgrade/
    [2] http://www.businessweek.com/news/2011-12-06/ecb-can-do-more-to-supply-lenders-with-liquidity-nowotny-says.html

  14. The ECB was a misguided venture from the start as i have always believed. A single currency set up between sovereign powers can not work without significant political cohesion and an established economic government, neither of which exist. Counter-cyclical economies complicate matters when the tools available the manage an expansive economy do not exist.
    Meanwhile governments like Spain and Italy run up tremendous amounts of debt and they can’t devalue their currency. The struggling economies are forced to lower prices and wages within the country to keep their goods competitive.
    The Eurozone’s lack of unity has proven to be unable to create action effective enough to help these countries within the instrumental structure of the ECB. Authorities have been indecisive, backing off of action in the face of criticisms, and the actions they do take, take needed liquidity from the market, in effort to sterilize their transactions at the fear of inflation.
    While inflation will help the indebted countries, it will damage countries like Germany, who are trying the prop up said debt.
    The struggling European countries got themselves into debt and countries like Germany are forcibly accountable. Countries like Greece can find their wait out with a national currency system.

  15. In its current state, the Euro will probably collapse within months if significant changes in policies are not enacted. Certain Eurozone leaders’ adamant refusal to reform their policy of strict inflation targeting is causing many analysts to predict a massive run on the banks in the Eurozone and a breakup of the EU. Former Dallas Fed president Bob McTeer’s analysis of recent GDP trends indicates that the Eurozone is heading towards an imminent recession. He argues that with this imminent recession, the ECB should no longer fully restrict any increases in their balance sheets because the recession makes unsterilized bond purchases less likely to be inflationary.(1)
    The Organization of Economic Cooperation and Development (OECD) is forecasting a significant slow in economic growth for the Eurozone countries, with expectations dropping to 0.2% in 2012 from an estimated 1.6% in 2011.(2) With such low growth expectations and unemployment set to rise, the ECB needs to consider greater intervention in the bond market if it wants to prevent the crisis from worsening any more.

    (1)http://www.forbes.com/sites/bobmcteer/2011/11/25/needed-ecb-bond-purchases-without-sterilization/
    (2)http://www.reuters.com/article/2011/11/28/oecd-eurozone-idUSL5E7MR0Z320111128

  16. The ECB chose to stick to inflation targeting and normal policy when the world was hit with the financial crisis. All the while, in the U.S. made many stimulus based actions injecting liquidity into the market and allowing banks to be bailed out. With these actions, many criticisms were made towards the Federal Reserve for the moral hazard possibilities. While the U.S. was taking these risks to avoid a economic collapse, Europe chose to stick back and is now paying the price as the 3rd and 4th largest economies in the Eurozone are on the verge of a possible default. [1] I believe that the ECB needs to take the easing approach that the Federal Reserve made, since it seems to be the only fast action that can be made at this point that has seemed to work in the U.S. at least to a degree. [2] That being said, I think that since the U.S. decided to pull the trigger on the stimulus bill and the ECB chose not to take the same risks, it is their problem to deal with. They racked up the debt that they have to find a way to repay, much like the U.S. did, so they must also find their own way to solve their own problem.

    [1]http://www.boston.com/news/world/europe/articles/2011/12/06/under_draghi_ecb_on_verge_of_major_policy_shift/?page=2
    [2]http://www.reuters.com/article/2011/12/06/us-investment-summit-ecb-idUSTRE7B52KJ20111206

  17. I believe the ECB should stick to its strict goal of inflation targeting. The ECB is very different from the U.S Fed which is able to target inflation and full employment. The ECB should stick to its current goal because it cannot reach full employment. Trying to do so will face several constrains such as European politics. How would the ECB be able to guarantee full employment in Spain, Portugal, and Greece without creating an opportunity cost for France and Germany? The Eurozone countries have their own labor laws and regulations. If the ECB try to interfere with local issues concerning jobs for example in Spain, it can create a backlash for politicians. Therefore, I agree with Mr. Weidmann that the ECB must stick to its goal of inflation targeting. Since the euro’s inception in 1999, the ECB was able to achieve its goal of an average two percent inflation rate (1).
    Yes, we should allow the euro to collapse! Let the European markets sort itself out, “Laissez-faire.” Of course it may not be that simple. In the Economist article “Who killed the euro zone?” it highlighted the problem of the euro zone crisis: a balance-of-payments problem. Many Eurozone countries like Italy, Greece, Spain, and Portugal embargo themselves in large public debts. As consequence, Italy now faces 10 year bond yields over 7% (2). In April the ECB raised its benchmark interest rate for just 25 basis points to inform the markets its commitment to low inflation. Moreover, Germany will not be able to continue to bail out its neighboring countries. The Eurozone should be set as a prestige club. During the creation of the euro as Mr. Moore rightfully point it out “the single European currency came into being without a single European economic government.” In business firms can file for chapter 7 or 11 bankruptcy in order to reconstruct itself or leave the market in disgrace. It’s time for Greece to file for bankruptcy and reconstruct itself even if that means leaving the Eurozone.

    (1) http://blogs.wsj.com/marketbeat/2011/10/12/ecbs-single-mandate-is-a-handcuff/
    (2) http://www.economist.com/blogs/freeexchange/2011/11/euro-crisis-21
    http://www.economist.com/blogs/freeexchange/2011/11/euro-crisis-15

Leave a Reply

Your email address will not be published. Required fields are marked *