The question is not whether to give priority to fiscal austerity or economic growth but to find the optimal degree of austerity and structural reforms for the maximisation of confidence.
The ECB’s non-standard monetary policy measures were taken to deal with problems in the financial sector and not to extend monetary policy easing beyond interest rate cuts.
In our view only there are two options for EMU 2.0: A hardening of EMU or a redrawing of the boundaries of EMU such that only countries meeting the real economy criteria for a currency union are members.
Below the surface of the euro area’s public debt and banking crisis lies a balance-of-payments crisis caused by the misalignment of internal real exchange rates. The path of least resistance seems to be an appreciation in creditor countries through the inflation of goods, services and asset prices. But will the electorates in the creditor countries accept a policy of easy money and exchange rate depreciation or push an exit from EMU?
Perhaps the prospect of currency competition would result in more cautious monetary policy by the ECB.
We need to dump the flat-earth theories promising that economic and financial outcomes can be planned with a high degree of certainty and need to look at other theories that accept the limits of our knowledge about the future. A revival of Austrian economics could be a good start for such a research programme.