The Euro-Area Crisis and the Monetary Policy Response of the ECB: A Critical Investigation and Some Reform Proposals

Abstract

This paper investigates the monetary–structural origins of the euro-area crisis and offers a critical analysis of the monetary policy decisions of the European Central Bank in this regard. The first section explains that the euro-area crisis is the unavoidable result of the monetary architecture of the European Monetary Union, where the TARGET2 payment system lacks an international settlement institution to make sure that every cross-border transaction is paid finally. To solve this issue, the second section suggests a monetary–structural reform of the TARGET2 payment system in the spirit of Keynes’s Plan. The third section focuses on the European Central Bank, to point out the major flaws and shortcomings of its monetary policy strategy, particularly after the euro-area crisis burst near the end of 2009. The last section concludes and provides some political economy considerations.