The Failure of ECB Monetary Policy from a Mises-Hayek Perspective

Abstract

The paper analyzes the failure of the common European monetary policy based on a Mises-Hayek overinvestment framework. It is shown how since the turn of the millennium an overly expansionary monetary policy contributed to unsustainable overinvestment booms in the southern and western periphery of the European Monetary Union and more recently in Germany. To explain idiosyncratic business cycles within the euro area before and since the outbreak of the European financial and debt crisis, the overinvestment theories are combined with the literature on optimum currency areas and on the role of fiscal policies in a monetary union. It is shown that the ECB’s ultra-loose monetary policy as a crisis therapy puts a drag on long-term growth in Europe by conserving distorted economic structures, which is seen as a risk for the whole European integration process. Therefore, a timely exit from the ultra-expansionary monetary policy is recommended.