Europe’s Perilous Quest for Stability

Jörg Bibow | February 14, 2013

Europe’s currency union is built on two key principles. The first is that the central bank must be independent of political control and its policies squarely focused on maintaining price stability. The second is that fiscal policy must be disciplined and never threaten price stability. Price stability, in turn, is the foundation for economic stability and prosperity. These principles and ideas are of German origin. And they distill the gist of Germany’s post WW2 economic history, an economic success story featuring both stability and growth.

The German success story was meant to be replicated at the European level. The European Central Bank copycatted the Bundesbank. As Germany’s constitution featured a “golden rule” limiting public budget deficits to public investment, a fiscal pact was to safeguard the ECB by decreeing budget deficits in excess of three percent of GDP as excessive and prescribing their speedy reduction. That pact was named the “Stability and Growth Pact” reflecting the German belief – based on historical experience – that fiscal and monetary discipline go along with both stability and growth.

Things have not played out according to script for Europe. …

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