David Beckworth has a very good post: “The Origins of the Eurozone Monetary Policy Crisis”:
I made the case in my last post that the Eurozone crisis was largely a monetary policy crisis. That is, had the ECB lowered interest rates sooner and begun its QE program six years ago the fate of the Eurozone would be more certain. Instead, it raised interest rates in 2008 and 2011, waited until this year to begin QE, and allowed inflation expectations to drift down. In short, had the ECB been more Fed-like the Eurozone crisis would have been far milder.
This begs the question as to why the ECB failed to act more Fed-like. Why did it effectively keep monetary policy so tight for so long?
For that question he provides a long answer. I´ll boil it down to two panels.
In panel 1 we have the behavior of NGDP relative to trend in 4 “core” countries (you may consider France “borderline”).
From this panel one could infer that the ECB (led by Trichet at the time) was setting policy in order to keep Germany, and only Germany, close to trend. When he increased rates in July 2008, Germany was the only core country above trend. In April and July 2011 Trichet raised rates again. Why? Because Germany, and only Germany, had climbed back to trend!
The negative effect of the 2011 rate rise was stronger in France than in the other core countries. France was on a “slow train” (compared to Germany) back to trend (green dashed trend line). Trichet, a Frenchman, threw France “off the train”!
You can imagine what the German-centric ECB actions did to the “periphery”. You don´t have to, just take a look at panel 2, that contemplates 4 peripheral countries:
Greece was “murdered”! Italy suffered with the 2001 rate rise. It was on the same “slow train” as France, but got ejected!
The amount of monetary tightening experienced in the “periphery” was an order of magnitude stronger than the tightening experienced by the core countries, and in Greece, it was about double the tightening experienced by its “peers”!
Bottom Line: “This is not a monetary union“. As is, the euro is unworkable.