Was monetary policy too tight after the crisis?

By: Patrick Minford, Cardiff University and CEPR

Yes, at least in Europe.

The depression of 2009

Wrong government policies on both sides of the Atlantic are turning a crisis into a catastrophe.

And now a currency crisis

Euro rises to an all-time high on a trade-weighted basis, as sterling-euro is fasting approaching parity; UK central bank says it, too, might to go ZIRP, and adopt quantitative easing; Germany’s Ifo index falls to the lowest level since 1982; ECB widens its interest rate margins to stops banks from hoarding cash; Belgium, meanwhile, has another government crisis, this time about undue government meddling with the judicial system in the case of the proposed sale of Fortis to BNP.

The Euro at £0.93 and $1.44

As eurozone economy tanks, a fast appreciate euro poses another threat; bond yields drop in US and in Europe following the Fed’s decision to adopt a policy of quantitative easing; EU softens anti-dumping rules during crisis; Germany plans next stimulus on January 12; President Nicholas Sarkozy, meanwhile, now wants a directorate to run the euro area, while the Czech and Swedes hold the EU presidency.

Welcome to ZIRP. The Fed is now officially fighting deflation.

Open market committee cuts fed funds target rate to 0/0.25% and adopts a policy of quantitative easing; the policy, adopted inofficially last month, has already led to a strong increase in the size of the Fed’s balance sheet; one direct effect is the several money market funds are now offering negative interest rates; in the eurozone, meanwhile, the latest purchasing managers surveys are consistent with a fall in forth quarter euro area GDP of at least 1%.

Germany expects less than minus 3 per cent growth

Economics ministry sees a catastrophic fall in economic output next year, giving impetus to a new stimulus programme; German government sources put the headline number at over €20bn, consisting mostly of structural measures (i.e. not much help for 2009 slump); Sarkozy plans a new aid package for the car industry tied to commitments to keep production in France; Dominique Strauss-Kahn forecasts a global recession, and a fall in Chinese growth to 5%, a level at which employment is shrinking fast; the euro, meanwhile, is rising and rising.

Merkel’s See-No-Evil, Hear-No-Evil economic summit

Merkel gathers friendly industry leaders for a domestic economic summit, but rejects any new stimulus; German newspaper report that stimulus will not be concluded before end-February at the earliest, and any deal might be delayed by intra-coalition wrangling; Obama’s economics is considering upping the stimulus to $1000bn over two years; the European Central Bank, meanwhile, is considering a shift of policies to stimulate the money market.