Actually, It Is Easy to Design Monetary Policy for the Euro Zone

Monday, 01 July 2013 07:22

A NYT story on the rise in the euro zone unemployment rate to 12.1 percent noted the sharp differences in unemployment rates across the euro zone and told readers:

"The divergence makes it difficult for the E.C.B. to craft a monetary policy that is appropriate for all members."

Actually this is not true. The euro zone needs expansion everywhere. It also needs re-balancing with the peripheral countries (e.g. Spain, Greece, and Portugal) becoming more competitive relative to the core countries (e.g. Germany and Austria).

If the ECB pursued more expansionary policy it would directly reduce the unemployment rate in the peripheral countries. It would also lead to somewhat higher inflation in the core countries, making the peripheral countries more competitive. This is exactly the results that we should want to see.

As a political matter this may be difficult because Germans have superstitions about inflation, but that is a political issue. There is no economic reason not to pursue more expansionary policy.