Paul Krugman in today’s New York Times has an excellent column criticizing the European Central bank for its mishandling of the sovereign debt crisis. I totally agree with him and I commented as follows below.
”Prof. Krugman is quite correct in connecting Europe’s crisis with the very ill informed policies of the strictly monetarist European Central bank which has been obsessed with inflation and largely ignored the issue of high unemployment since its inception.The Euro is an overvalued currency because of these policies. This in turn reinforces higher unemployment because of the strain an overvalued currency places on exports.I would go even further than he does when he writes that in a time of high unemployment it is unlikely that the European central bank buying a greater quantity of sovereign debt from countries that face speculative pressure on the bonds that finance their debts in order to relieve the situation and prevent the excessive interest they will otherwise pay from provoking a default will lead to inflation. When one compares the total debt issuance that is held by the central bank in comparison to the broadly defined money stock there is plenty of room for the purchase of the debt as a temporary expedient until the speculative fever is broken with virtually zero risk of provoking serious inflation. In addition a policy of co-ordinated fiscal stimulus that directly addresses the problem of high unemployment in Europe is necessary. Much of what has gone wrong in Europe was predicted by Keynesian critics of the Euro when it was first introduced. You cannot run a common currency without the institutions and practices of a true central bank that involves itself in debt management and a political sharing of burdens such as we see in other federations like the U.S.and Canada. Without such institutions and conventions countries are better off with their own currency and their own central bank in order to better manage the business cycle. ”
I would add to this the fact that M2 is 8,510,515 million euros and so far the ECB has bought 137 billion of sovereign debt and added it to its balance sheet. Hence there is still plenty of room to acquire more debt without any risk of inflation.