The Monetary Policy Origins of the Eurozone Crisis

The Eurozone crisis represents one of the greatest economic tragedies of the past century. It has caused immense human suffering, which continues to this day. The standard view attributes the economic crisis to an earlier buildup of public and private debt that was augmented by the imposition of austerity during the crisis. Although evidence exists of a relationship between (a) the debt buildup and austerity measures and (b) economic growth during the crisis, that same evidence, on closer examination, points to Eurozone countries’ common monetary policy as the real culprit behind the area’s sharp decline in economic activity. In particular, it seems that the European Central Bank’s tightening of monetary policy in 2008 and again in 2010-2011 not only caused two recessions but also sparked the sovereign debt crisis—and gave teeth to the austerity programs. Such findings point to the need for a new monetary policy regime in the Eurozone. The case is made for the new regime to be a targeted growth path for total money spending.

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