"Greco-German Monetary Policy"
Republicans caved on filibustering the motion to open debate on the financial regulation bill, so we’ll see what happens with that. The more important story continues to be the Greek debt crisis and the possible meltdown of European monetary institutions. Paul Krugman writes that he used to think leaving the Euro was impossible because it would cause massive bank runs, but that if Greece defaults and starts seeing massive bank runs anyway then leaving the Euro starts to look as possible as anything else.
Certainly my amateur opinion is that if a country can leave the Euro without that prompting a disaster (even if the only reason that’s possible is that a disaster is already under way), then that would look pretty compelling to me. The Euro is a questionable idea in economic theory, but it’s actually proven to be a worse idea in practice. Rather than try to run monetary policy that would be suitable for the median European economy, the European Central Bank has insisted on trying to run monetary policy that would be suitable for Germany. And not even suitable for Germany in general, but “suitable for Germany according to hard money fanatics.” That’s probably bad for Germany, but there’s certainly no reason to think it’s appropriate for southern Europe. Consequently, we’ve seen deflationary bias from the ECB for years and as Nick Rowe points out the ECB is likely to respond to this crisis with measures that prompt further disinflation.
This is a real human disaster for almost everyone involved, but never fear because one senior European monetary official once assured me that the purpose of central bank independence is that it gives him freedom to fight inflation “regardless of the human cost.” It’s true that Greece’s fiscal situation would be unsustainable regardless of monetary policy, but it’s also true that being subjected to Frankfurt’s monetary policy preferences make balanced growth in Southern Europe impossible regardless of fiscal policy. You just need to look at Spain, which pre-crisis was running a surplus with a low debt-GDP ratio:
But despite having done everything that’s now being urged on Greece, Spain is totally screwed. People like to see pat morality tales in macroeconomic events, so that today’s problem countries are being punished for past irresponsibility. But there’s honestly little reason to see that as a major part of the story. Worse than a crime, we’re looking at a mistake. A mistake for which a very large number of people around the world may wind up paying the price.