Jan Toporowski: Notes on the Eurozone Crisis

1. The crisis arises out of faulty institutional design rather than bad policy mix. The faulty institutional design was embedded in the Maastricht Treaty of 1992, with its restrictions on Government deficits and a ceiling on the Government debt to GDP ratio. Underlying this was a conviction that monetary stability meant low inflation, and that the key to low inflation was low Government borrowing. The fault in the institutional design is the ban on central bank holding of Government bonds. This is inspired by the ruling policy doctrines of the pre-War German Reichsbank, whose President in the 1930s Hjalmar Schacht only avoided conviction at Nuremburg because he had been removed by Hitler from his position at the Reichsbank after protesting at the over-issue of German Treasury bills which the Reichsbank was supposed to discount. More

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