The Euromess in a Nutshell

Slate‘s Matt Yglesias has written a post on the policies of the European Central Bank that makes such abundant good sense that I’m going to quote it at some length:

The overwhelming conventional wisdom among elites in Europe and the United States is that Europe suffers from overregulated labor markets….And the deeper the crisis has gotten, the more the European Central Bank has gotten itself involved with this question. Instead of pursuing a single mandate of price stability or a dual mandate of prices and employment, it’s implementing a two-target strategy that involves price controls and specific political outcomes. Basically countries that implement structural policies that ECB staffers favor are rewarded with less-inappropriate monetary conditions, and countries that challenge the ECB consensus are punished.

This is contrary to democratic values, plainly incompatible with sound monetary practice, and a terrible way to encourage sound structural reforms to boot.

A much much better path would be for the central bank to simply say there are some things it can guarantee and other things it cannot guarantee. High on the list of things the ECB can guarantee are robust continent-wide growth in nominal gross domestic product. Among the things the ECB cannot guarantee is the split between real output and inflation. A country that combines rapid NGDP growth with bad labor market policies will have a lot of inflation. A country that combines rapid NGDP growth with good labor market policies will have a lot of real growth. But the genius of this is that it’s true by definition and doesn’t require us to work out in advance which labor market policies are good and which are bad. Presumably people prefer to live in a country where nominal growth turns into real output rather than higher prices. But if the political system doesn’t deliver that outcome, that’s for the political system to work out.

Instead, the ECB is refusing to deliver what it’s supposed to deliver—nominal growth—and instead mucking around in decisions that should be none of its business, and it’s doing so in a way that’s going to make it impossible to tell which policies are actually working.

For all the perils involved in politicians trying to be bankers, bankers trying to be politicians–unelected politicians at that–is almost invariably worse.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.