The euro area's "one-size-fits-all" monetary policy has never been a joke that some economists intended it to be. It was a serious warning about the limits the area's central bank would face in an economic system of deep-seated labor market rigidities, structural and political differences, and independent and uncoordinated fiscal policies.
That warning has been well-known to economists and their political bosses ever since the first drafts of the European monetary union were written in the late 1960s. And it is a tragedy for those 16.3 million people who are currently unemployed in the euro area that the new generations of European leaders have yet to come to terms with fundamental problems posed by a single currency.
Put in a more familiar language, these European leaders put a cart before the horse. And the horse is the European Central Bank (ECB), whose trillions of free euros are eliciting widely different responses in segments of a structurally and cyclically uncoordinated economic space it is supposed to manage.
One against all
Germany, for example, does not want zero interest rates and those trillions of euros created through ECB's massive asset purchases. Germany is a fully-employed economy with balanced public finances and an exploding current account surplus of 9 percent of GDP. With a 1.8 percent annual growth in the first half of this year, the economy is running almost an entire percentage point above its potential and noninflationary growth.
Germans are complaining about an overheated real estate market, and the country's fund managers are furious that the ECB has been snapping up, since early June, all the high-quality corporate bonds. That was part of the ECB's QE programs to keep flooding the market with fresh liquidity.
You understand now why the Germans are up in arms about the ECB policy, and why they are making that known all the way to their Constitutional Court and the European Court of Justice.
Now, for a sharp contrast, take a look at Italy. On a quarterly basis, there has been virtually no growth in the first half of this year. In fact, the economy has been declining and stagnating over the last four years, and is currently experiencing a price deflation.
Italy's 3 million of unemployed in June (10.6 percent of the labor force) are only slightly below that level in the same month of last year. A shocking 36.5 percent of the country's youth is out of work.