The monetary policy origins of the eurozone crisis

• Published date: 01 June 2017
• Author: David Beckworth
• Date: 01 June 2017
• DOI: http://doi.org/10.1111/infi.12110

DOI: 10.1111/infi.12110

ARTICLE

The monetary policy origins of the eurozone crisis

David Beckworth

The Mercatus Center at George Mason

University, Arlington, Virginia

Correspondence

David Beckworth, The Mercatus Center

at George Mason University, 3434

Washington Blvd., Arlington,

VA 22201, USA.

Email: dbeckworth@mercatus.gmu.edu

Abstract

The eurozone crisis represen ts one of the greatest

economic tragedies of the pa st century. It has caused

immense human suffering, which continues to this day .

The standard view attributes the ec onomic crisis to an

earlier buildup of public and p rivate debt that was

augmented by the imposition of au sterity during the crisis.

Although evidence exists of a relationship betwe en the

debt buildup, austerity meas ures, and economic growth

during the crisis, that same evid ence, on closer examina-

tion, points to eurozone c ountries’common monetary

policy as the real culprit beh ind the area’s sharp decline in

economic activity. In particul ar, it seems that the

European Central Bank’s tigh tening of monetary policy

in 2008 and again in 2010–2011 not only caused tw o

recessions but also sparked th e sovereign debt crisis and

gave teeth to the austerity pro grams. Such findings point

to the need for a new monetary pol icy regime in the

eurozone. The case is made for the new regime to be a

targeted growth path for total mo ney spending.

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INTRODUCTION

Since 2008, one of the greatest economic tragedies of the past century has been unfolding in the

eurozone. As seen in Figure 1, the region has endured two sharp recessions and a consistently

underperforming economy during this period. The eurozone’s unemployment rate topped 12% at its

peak, and deflation buffeted the region twice. Reported levels of alcohol abuse, psychological stress,

and suicides soared over this period (Ellyatt, 2012). Many observers view this crisis as a full-blown

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© 2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/infi International Finance. 2017;20:114–134.

depression, and some even believe it matches the severity of Europe’s Great Depression of the 1930s

(Avent, 2012; Aziz, 2014; Crafts, 2013; O’Brien, 2014).

Though the pain caused by the eurozone’s economic crisis has been acute, it has not been evenly

distributed. The second and third columns of Figure 1 show that the core region of the eurozone saw its

economy decline 2% below its precrisis trend by the end of 2014, compared to a 25% decline for the

periphery.

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Similarly, the core region experienced a peak unemployment rate of approximately 8%,

compared to almost 18% for the periphery. Such disparate economic effects meant that the periphery

countries suffered far more fallout from the crisis than did their counterparts in the eurozone’s core

region. In particular, periphery countries faced rising public-debt burdens from bailing out the private

sector and from having less national income to service their debts. In turn, the mounting debt burden

raised the specter of sovereign default and sparked an outflow of capital from the periphery.

These divergent outcomes fuelled rising tensions among eurozone members. Core countries

insisted that any debt restructuring or bailout package for the periphery countries be conditional on

those countries adopting austerity measures to rein in government budgets.

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Unsurprisingly, periphery

countries were not thrilled about raising taxes and cutting government spending in the midst of a deep

recession. Tensions also rose among member countries over the extent to which monetary policy

should address the crisis. Though the European Central Bank (ECB) did take some action during the

crisis, the periphery countries wanted the ECB to more aggressively ease monetary policy. The core

countries, especially Germany, were against such actions, and because of their objections, the ECB

only began a quantitative easing (QE) program on March 9, 2015.

FIGURE 1 The eurozone crisis

Notes: Gray bars = GDP recession; core countries = Austria, Belgium, Finland, France, Germany, and the

Netherlands; periphery countries = Greece, Ireland, Italy, Portugal, and Spain

Sources: Eurostat; author’s calculations

BECKWORTH

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