Does the European Central Bank Play a Role in the Recent Euro crisis?
On March 25, 1957, the Treaty of Rome was signed by five European countries to form the European Economic Community — the predecessor of European Union. The treaty “agreed upon the necessity to promote improvement of living and working conditions of labor so as to permit equalization of such conditions in an upward direction.”
However, what happened after the financial crisis seems to be the exact opposite of what politicians hoped to achieve. At a glance, compared to the United States real GDP per capita growth of about 3.2% from 2007 to 2015, the European Union has had a dismal performance of approximately 0.8% growth. The Eurozone especially suffers, with a negative 1.7% growth. To be specific, while Irish cumulative real GDP growth appears to be about 8% during 2007 to 2015, Greece’s seems to be negative 25%. From those statistics, we can perceive that the European Union has neither pushed its economic growth in an upward trend nor helped balance countries’ economic power within the Eurozone.
So, what happened?
Some scholars argue that the Eurozone has many fundamental flaws. With the belief in the efficient market (neoliberalism), ECB’s mandate solely focuses on the inflation rate. However, bankers in ECB did not anticipate the coming of 2008 financial crisis, when the market itself created the wildest fluctuations in outputs and employment. With no attention being paid to financial stability and unemployment, there would be a consistent gap between actual and potential output regardless of whether there is a crisis or not.
More disastrously, with the single mandate, is ECB’s method to curing the rising inflation if a crisis causes cost-push inflation on energy and food prices — rising interest rates. Not only would workers suffer from higher prices, but businesses also face a decrease in demand for the goods they produce.
Moreover, the single mandate performs worse when other central banks have more flexible mandates. For example, while the Fed can lower interest rates to cure unemployment, the uprising interest rate in the Eurozone attracts investors to put their money in ECB, therefore increasing the demand for Euros and weakening the Eurozone’s exports.
Other scholars also point out the poorly designed austerity program that is supposed to help ‘crisis’ countries grow their economy. As the program requires countries to meet the primary budget surplus about 3.5%, governments cannot stimulate the economy when it needs the most. Since the country cannot increase their expenditure on infrastructure, education, and technology, the austerity program often leads to short-term unemployment and long-term slow economic growth.
Maybe it is the time to consider a Keysinan approach to reverse the recession if necessary in the Eurozone.
