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European Central Bank Continues Tight Money Rampage With Rate Hike Despite 10 Percent Unemployment

By Matthew Yglesias on July 7, 2011 at 11:29 am

"European Central Bank Continues Tight Money Rampage With Rate Hike Despite 10 Percent Unemployment"

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One element of sympathy I do have to offer to American policymakers is that they’re operating in a global economy featuring many other actors who appear to have completely taken leave of their senses. The European Central Bank, for example, is engaging in its second interest rate increase of the year even though — smug Germans aside — Eurozone unemployment is at 9.9 percent.

Not only would loose money be good for real growth in the Eurozone’s depressed economies, a bit of elevated inflation would make the kind of sovereign debt issues they’re dealing with much easier to solve. Last, if you think about the problem of divergence between the low unemployment German-led “core” block and the high unemployment periphery, it seems to me that persistent labor shortages in the “core” are exactly what’s needed. That should either induce migration from Spain, Portugal, etc. northward to where the jobs are or else induce core-based firms to find ways to shift some production to the periphery. Obviously, that’s not an ideal strategy, but the ideal strategy would have been for these different countries with weakly integrated labor markets not to have yoked themselves together in the first place.

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