7. Count Draghila

This chapter examines the European crisis from the point of view of monetary policy. Based on the monetary issues discussed in the previous chapters, we explain how monetary policy works in ordinary circumstances. We then look at non-conventional measures initiated by the ECB in 2008. The ECB’s action became more effective with Draghi, but could only partially make up for the absence of appropriate European fiscal policy. In fact, European fiscal policy, based on pursuit of a balanced budget and obsession with public debt, does not work in tandem with monetary policy. From a Keynesian viewpoint, the central bank should primarily serve fiscal policy in the pursuit of full employment as well as price stability. Finally, we explain a controversy that raged in 2011–2012, but has never really died down: Target2, the European payment system. Appendix 1 completes our analysis of ECB monetary policy from a central bank balance sheet perspective. This is an excellent vantage point for reviewing conventional and unconventional monetary policies. Appendix 2 provides further details of Target2, discussing whether Target2 imbalances constitute real debt between EMU countries.