(Monetary) policy options for the euro area: A compendium to the crisis

Abstract

Nine years after Lehman, the euro area remains mired in stagnation which stands in stark contrast to the economic recovery in the US or the UK. This chapter takes a look at the macroeconomic policies that have led to this outcome within the particular institutional setup of the euro area and discusses feasible ways forward. It argues that procyclical fiscal tightening has exacerbated the crisis and, given constraints to monetary policy and limits to what structural reforms can deliver, increased the likelihood of becoming stuck in an equilibrium characterized by low growth and low inflation which has contributed to rising anti-European sentiment. Since the required change of direction does not seem imminent, the outright creation of broad money would provide an effective tool to salvage stable prices, growth, and employment. If done diligently, such a monetary policy operation would be squarely within the ECB's remit without compromising its independence or credibility.