New York Times
April 7, 2011
“If you take the euro area as a whole . . .”
So began a response Thursday from Jean-Claude Trichet, the president of the European Central Bank, as he explained the central bank’s decision to raise interest rates in Europe.
If only there were a “euro area as a whole.”
Instead, the big challenge facing the euro area is precisely that it is not a whole. Europe chose monetary union without political or economic union. There were wide spreads in inflation, and lower interest rates in the decade after the euro was created allowed some peripheral countries to ignore needs for economic reform.
Now Germany is booming. Other countries are in deep recessions.
The reasons vary. Ireland’s financial system collapsed in the wake of a property bust that makes the American experience seem mild. Greece lost all competitiveness. Portugal confronts a little of both. All those countries have been forced to adopt austerity, which is what we call harsh fiscal policies these days. The last thing any of them need is a tightening of monetary policy. Now they have it, in large part because Germany is worried about inflation.
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