Europe’s Monetary Woes

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.

DOES IT FEEL LIKE POLITICS IS AT A BREAKING POINT?

Headshot of Editor in Chief of Mother Jones, Clara Jeffery

It sure feels that way to me, and here at Mother Jones, we’ve been thinking a lot about what journalism needs to do differently, and how we can have the biggest impact.

We kept coming back to one word: corruption. Democracy and the rule of law being undermined by those with wealth and power for their own gain. So we're launching an ambitious Mother Jones Corruption Project to do deep, time-intensive reporting on systemic corruption, and asking the MoJo community to help crowdfund it.

We aim to hire, build a team, and give them the time and space needed to understand how we got here and how we might get out. We want to dig into the forces and decisions that have allowed massive conflicts of interest, influence peddling, and win-at-all-costs politics to flourish.

It's unlike anything we've done, and we have seed funding to get started, but we're looking to raise $500,000 from readers by July when we'll be making key budgeting decisions—and the more resources we have by then, the deeper we can dig. If our plan sounds good to you, please help kickstart it with a tax-deductible donation today.

Thanks for reading—whether or not you can pitch in today, or ever, I'm glad you're with us.

Signed by Clara Jeffery

Clara Jeffery, Editor-in-Chief

We Recommend

Latest

Sign up for our newsletters

Subscribe and we'll send Mother Jones straight 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

Share your feedback: We’re planning to launch a new version of the comments section. Help us test it.