Asymmetric Trends and European Monetary Policy in the post-Bretton Woods Era

This paper argues that the depth and longevity of the crisis in the eurozone is due to structural and institutional differences between its members and that these are difficult to handle in a monetary union. We show this, first, by a test of the ‘one-size-fits-all’ ECB monetary policy. The results provide an estimate of how ECB at the same time fuelled some ‘bubble economies’ and put on a deflationary pressure in other economies. Second, we measure how the higher inflation rate in the periphery eroded its international competitiveness under the restriction of the ‘irrevocably fixed exchange rates’. This is compared with the development during preceding decades with more flexible exchange rates. The catch-up and convergence of incomes within Western Europe, up to the mid-1990s, was significantly enhanced by exchange rate adjustments. Without this adjustment mechanism catch-up has got a headwind which is contributing to the recent widening of the income gap in the eurozone. Thus, as a historical irony, the Maastricht aim of further integration has actually been counteracted by the economic mechanisms of the monetary unification.