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However, the experiences of particular nations and the details of monetary policy-making were harrowing for the eurozone’s decision-takers. In some countries and in some years prices fell by several per cent, raising concern that deflation might become entrenched. Worse was the unevenness of the deflationary risk. Germany did quite well. In 2009 it succumbed to the Great Recession, like almost every country, but it did not undergo any further declines in national output. By contrast, the rest of the eurozone entered a second recession in 2012 and 2013, with some member states suffering traumatic declines in demand, output and employment. Worst hit were Cyprus, Greece and Italy.

People who had left money with Cyprus’s banks lost a high proportion of their deposits in March 2013, a disaster at the level of an entire nation which is unique in modern times. (Note the differences from the Northern Rock case in the UK. Depositors had all their money returned, while the British state  made a profit from its disreputable seizure of the bank from its shareholders.) The Greek government had lied to the European Commission and the International Monetary Fund, as well as to its own people, about the size of the public debt. In 2011 it reneged on its obligations to private creditors, in the world’s largest-ever sovereign debt default. Notoriously, some of its politicians — including the headline-seeking Yanis Varoufakis, its minister of finance in early 2015 — threatened to take Greece out of the eurozone in a brazen attempt to undermine the legitimacy of the single currency project. Less noticed in the British media, Italy’s gross domestic product went down by 2.3 per cent in 2012, 1.9 per cent in 2013 and 0.6 per cent in 2014. 

Although the Greek challenge to the euro was rebuffed, quarrels between the different member states were openly reported. Even worse, the overarching European Union organisations (notably the Commission and the European Central Bank) clashed in public with politicians representing their own nations’ interests. One lesson of the six years to end-2014 — and particularly of 2012 and 2013, when the eurozone’s macroeconomic plight was far worse than that of the rest of the advanced world — was that too low growth of the quantity of money can cause deflationary headaches, just as too fast growth of the quantity of money can result in disagreeably high inflation.

The obvious question is, “why did money growth fall from an annual growth rate of 7.5 per cent a year in the decade or so before the Great Recession to a mere 2 per cent during and after it?”. Much of the answer is that the banking system was weakened by the events of the Great Recession and the regulatory response to crisis. The downturn of 2009 was accompanied by a big fall in asset prices, including the prices of houses and commercial property. Many eurozone banks found that the collateral for their loans had slumped in value, so that a significant proportion of their loans could not be repaid in full. As they had therefore lost part of their capital, they would have had to restrict their assets even if regulatory capital/asset ratios had stayed the same.
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untenured
July 9th, 2018
11:07 AM
"our analysis will have a deeply worrying message for those who believe — as Europe’s single currency approaches its 20th birthday — that its future is secure." It is secure because it is one of the essential constituents of the Average Empire, which is the proper description of the EU, whatever it pays its PR to say. All the EU has achieved in its short history is the ruination of its statelets, with its ceaseless determination to lay down regulations which, it is told, will make it ever more popular.

Anonymous
July 4th, 2018
9:07 AM
Whoever replaces Sr. Draghi, they just need an enigmatic smile and the ability to watch the ballooning ECB balance sheet expand relentlessly. A cryptic statement from time to time, will keep the economist community happy as they obsess over QE and ignore ZIRP.

Anonymous
June 29th, 2018
9:06 AM
Sr. Draghi's only responsibility is to take in any delinquent loan denominated in €, put it in the safe with all the others and hand the bearer a brand new shiny ECB version in exchange. It means that when, let's say Germany, comes along to be paid out, they will be invited to root around in the safe and find something that's worth more than the paper it's written on. Fat chance.

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