Europe’s Monetary Woes

Let our journalists help you make sense of the noise: Subscribe to the Mother Jones Daily newsletter and get a recap of news that matters.

Via Ryan Avent, Fernanda Nechio of the San Francisco Fed has produced a chart that demonstrates Europe’s monetary problems in a nutshell. It shows the interest rate target of the European Central Bank (red line) compared to the rate suggested by a simple application of the Taylor rule. But instead of looking at the euro area as a whole, he breaks it into a set of core countries (Germany, France, and a few others) and peripheral countries (Portugal, Ireland, Greece, and Spain).

This makes Europe’s problem clear: it’s a lousy currency area. Between 2001 and 2006, ECB policy was OK for the core economies but way too permissive for the peripheral economies, which eventually spiraled out of control. Then, ever since 2009, ECB policy has been far too restrictive for the periphery. Roughly speaking, the ECB has run monetary policy all along so that it’s fairly reasonable for the big, central economies of Germany and France but monstrously inappropriate for the smaller economies on the periphery. The result has been catastrophic.

There’s a bit of evidence — take it with a grain of salt — that the ECB is perfectly happy with this state of affairs and hopes to use the current crisis to force closer fiscal union on the euro area’s governments. But given the ECB’s obvious bias in favor of Europe’s core economies, Ryan says, “If the ECB is unsuccessful in winning such progress from core governments, however, we shouldn’t be surprised if peripheral economies find euro-zone policy intolerable and — eventually — drop out of the system entirely.” We’ll see.

FACT:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2020 demands.

payment methods

FACT:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2020 demands.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate