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The Policy Debate Europe Needs

Summary:
How can the eurozone get the fiscal stimulus it needs, and which European Central Bank President Christine Lagarde is urging, in the face of the refusal by some countries, starting with Germany, to run budget deficits? There is a good answer, but it doesn't involve attempting to cicumvent the intent of the ECB's statute. SASKATOON – The eurozone is in a bind. Despite successive doses of monetary stimulus by the European Central Bank, inflation remains stubbornly below target. Conventional monetary policy and even quantitative easing evidently have limited potency when interest rates are at or near zero. Is Growth Passé? Kanok Sulaiman/Getty Images

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How can the eurozone get the fiscal stimulus it needs, and which European Central Bank President Christine Lagarde is urging, in the face of the refusal by some countries, starting with Germany, to run budget deficits? There is a good answer, but it doesn't involve attempting to cicumvent the intent of the ECB's statute.

SASKATOON – The eurozone is in a bind. Despite successive doses of monetary stimulus by the European Central Bank, inflation remains stubbornly below target. Conventional monetary policy and even quantitative easing evidently have limited potency when interest rates are at or near zero.

Monetary skeptics worry, moreover, that lowering rates further will damage Europe’s banks. Additional asset purchases beyond the monthly level of €20 billion ($22...

Barry Eichengreen
Barry Eichengreen is Professor of Economics at the University of California, Berkeley; Pitt Professor of American History and Institutions at the University of Cambridge; and a former senior policy adviser at the International Monetary Fund.

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