Are the euro zone’s continuing woes the result of its incomplete construction? Or because of policy errors in responding to the crisis?
The euro area member states gave up monetary policies for countering economic adversities, but the founding fathers lacked political will to compensate with pooled resources for helping each other. This incompleteness is surely made worse by wrong-headed policies, delays, and half measures. That said, the distinction is overstated: the incomplete monetary union and repeated policy errors likely come from the same source.
Recent research shows the ECB fell behind the curve at critical junctures of the crisis.
As the U.S. Federal Reserve slashed interest rates to fight the Great Recession, the ECB at first raised the policy interest rate in July 2008. That hike came just as euro area industrial production began a prolonged economic contraction.
In April and July 2011, the ECB raised interest rates when the American rate was near zero and the Fed was adding stimulus through quantitative easing.