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Blame ECB for EU political earthquake

Thursday, May 29 16:22:27

An "earthquake" is what French Prime Minister Manuel Valls called the election results for the European Parliament in his country, and other countries are feeling the tremors.

One news recap summarised the outcome this way: "Across the continent, anti-establishment parties of the far right and hard left more than doubled their representation, harnessing a mood of anger with Brussels over austerity, mass unemployment and immigration."

Europe's political elites have only themselves to blame for the public's increasing anger with them. Saddling much of the European Union with a single currency, the euro, has been a quintessentially elite project, pushed by the great and good over the objections of wary populations. The euro has turned out to be a big mistake for many of those countries, one compounded by the perverse way the European Central Bank has managed it.

It was a mistake, first, because the countries of the euro area needed different monetary policies, which they couldn't have within the same currency. For much of the euro's history, the ECB has set monetary policy in a way that was appropriate for the German economy, but first too loose and then too tight for other countries. Since the financial crisis hit in 2008, the ECB has been much too tight.

In a recent issue of National Review, the economist David Beckworth and I looked at the performance of several economies over the past few years. We noted that the more a central bank had done to keep nominal spending growing at a steady rate, the better the economy had performed.

Australia, for example, kept nominal spending on its pre-crisis path and did well. The U.S. allowed nominal spending to fall sharply and then grow slowly, and its economic performance has been mediocre.

In the euro area, though, the ECB allowed a gap between nominal spending and its trend path to open up and then keep expanding. It even raised interest rates, tightening monetary policy, as this gap grew.

The high unemployment enraging so many voters in Europe is in large part a result of disastrous monetary policy. Throughout this crisis, however, Europe's leaders have seemed more intent on preserving the single currency than on making it less of a burden for the inhabitants of the euro area.

The only thing that's surprising about the political earthquake in Europe is how mild it has been. So far. (Bloomberg)