The Euro and its Guardian of Stability: The Fiction and Reality of the 10th Anniversary Blast

Abstract

This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated "stability oriented" policy wisdom inherited from Germany's mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.

From Anti-Growth Bias to Quantitative Easing: The ECB’s Belated Conversion?

“…Since the euro's inception in 1999, the ECB has revealed a special gift for detecting inflationary risks, even when no one else can, paired with remarkable complacency with regard to deflationary risks. As a result, the ECB is always quick to hike, but conspicuously slow to ease, its monetary stance-an asymmetry in mindset and approach that amounts to an antigrowth bias (Bibow 2012).…”

“…The ECB inherited its antigrowth bias from the German Bundesbank, which served as its model, both institutionally and intellectually. The Bundesbank is famous for both its own monetary "hawkishness" as well as Germany's low inflation record; the latter outcome being typically attributed to the former quality (Marsh 1992 (Bibow 2012). …”

“…It should have been obvious that the German model would run into trouble as soon as it was exported to Germany's main trading partners-which is precisely what the euro currency union was all about (Bibow 2012).…”

“…And so the ECB's aggressive inflation-fighting mindset ran into a time-inconsistency problem: by undermining the euro area's growth prospects the ECB's aggressive hikes were judged unsustainable. In this way, the ECB's hikes plunged the euro, which, in the fall of 2000, even led to coordinated currency market interventions (Bibow 2012). …”

Lost at Sea: The Euro Needs a Euro Treasury

“…As I have dwelt on this issue elsewhere (see Bibow 2007bBibow , 2012bBibow , 2013b Importantly, the model not only worked for the Bundesbank, which established its reputation as the number one inflation fighter on the planet. It also worked well for Germany since price the post-war economic order in Germany emphasizing the importance of market competition and stable money.…”