Paul Krugman: The Macroeconomics of European Disunion


 

Wolfgang Münchau makes a point that isn’t new, but still gets overlooked too often: the euro area is, for practical macroeconomic purposes, a single unit — and one that doesn’t really do all that much trade with the rest of the world. Aggregate euro area policy, monetary and fiscal, should therefore be subject to more or less the same rules that apply to the United States.

Yet because monetary union wasn’t accompanied by political union, the continent as a whole is pursuing what amount to insanely restrictive policies. Here we have an economy with massive unemployment and inflation that is too low by any reasonable standard (Europe, even more than America, would do a lot better with a 4 percent inflation target):

Yet what we see is sharply restrictive fiscal policy:

And the ECB isn’t even trying to offset this fiscal drag with expansionary monetary policy, in part because of fear of adverse reactions to possible higher inflation in Germany.

We can and often do get bogged down in the details of country analysis, not to mention the difficult politics of the situation. But every once in a while it’s worth backing up and thinking about the fundamental craziness of aggregate European policy.

The Macroeconomics of European Disunion – NYTimes.com

This entry was posted in Europe, HomeWork, Paul Krugman, Wolfgang Münchau. Bookmark the permalink.

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