Institutions in Crisis

Institutions in Crisis

European Perspectives on the Recession

New Thinking in Political Economy series

Edited by David Howden

This critical and thought-provoking book explores the causes and consequences of Europe’s failed political and economic institutions. Europe’s recession has created new challenges as market turmoil has shaken the foundations of the twin pillars of the new drive for European integration – political and monetary unions. This book critically assesses the patchwork solutions continually offered to hold the troubled unions together. Failed political policies, from the prodigious ‘Common Agricultural Policy’ to ever more common fiscal stimulus packages, are shown to have bred less than stellar results in the past, and to have devastating implications for future European growth. The contributors outline the manner through which European monetary union has subsidized and continues to exacerbate the burgeoning debt crisis. Most strikingly, the interplay between Europe’s political and economic realms is exposed as the boondoggle it is, with increasingly bureaucratic institutions plaguing the continent and endangering future potential.

Chapter 9: From German Rules to European Discretion: Policy’s Slippery Slope

Malte Tobias Kähler

Subjects: economics and finance, austrian economics, political economy, politics and public policy, political economy


Malte Tobias Kähler The German Deutschmark was long considered to be among the strongest currencies in the world. In its statutes, the emitting central bank (the Bundesbank) confirmed price stability to be its main goal and managed to ‘[establish] its reputation as one of the most successful central banks in the world’ (Beyer et. al., 2009, p. 1). Indeed, from the end of Bretton-Woods until one year before the German reunification (1973–89), average annual inflation was lower in West Germany than in any other OECD country (Clarida and Gertler, 1996, p. 1). Furthermore, monetary policy was embedded in a general framework of economic policy that sought a viable equilibrium between four policy tasks that are believed to be conflicting: price stability, low unemployment, a low trade deficit and continuous growth.1 Price stability aims at maintaining a moderate inflation rate, which is believed to provide guidance to the public in forming expectations of future price developments. Low unemployment is beneficial for the overall economy as unemployed people mean idle resources not used in the economy. Maintaining a low trade deficit ensures that no imbalance will endure and inflation is thus neither imported nor exported. Within this framework, the Bundesbank was committed to maintaining a policy of low inflation. This rule-based mandate2 of the German monetary authority served as the role model for the European System of Central Banks (ESCB) in its early years. In order to safeguard the currency, the Bundesbank was freed from the demands of fiscal policy...

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