The typical view blames the Eurozone crisis on excessive debt, worsened by austerity. Some members like Greece built up far too much private and public debt before the crisis, the narrative runs, and they were unable to cushion its blow on the macroeconomy, since without control of their own currency, fiscal easing would make the debt problem worse in the short run.
I think the typical view is wrong. I think that certain Eurozone countries (again, Greece stands out) did have terrible economic policy regimes running up to the crisis, but that these were only tenuously linked to mass unemployment, repeated solvency crises, huge bailouts and years upon years of misery. I think that most of the debt crisis was driven by poor macroeconomic management by the European Central Bank, which held policy excessively tight.
There are casual ways of showing this. Consider, for example, how the ECB took far longer than the Bank of England and the Federal Reserve to buy assets and thus expand the money supply through Quantitative Easing.
In a free market, economic shocks lead to a higher demand to hold safe assets like currency, and free banks accommodate this by printing. Neither the BoE nor the Fed did enough to accommodate this market thirst, but they did print a lot of money, and ameliorate the problem somewhat. It took the ECB years to follow suit.
Although evidence exists of a relationship between (a) the debt buildup and austerity measures and (b) economic growth during the crisis, that same evidence, on closer examination, points to Eurozone countries’ common monetary policy as the real culprit behind the area’s sharp decline in economic activity. In particular, it seems that the European Central Bank’s tightening of monetary policy in 2008 and again in 2010–2011 not only caused two recessions but also sparked the sovereign debt crisis—and gave teeth to the austerity programs.
Beckworth goes on to propose a new rules-based monetary regime centred around a stable nominal GDP growth path. Not coincidentally, we here at the ASI favour such a scheme as the closest approximation of what would go on if we had a purely free market, and indeed a step in that direction.