The Failure of ECB Monetary Policy from a Mises-Hayek Perspective

Abstract

The paper analyses the common European monetary policy based on a Mises-Hayek over-investment framework, which is combined with the theory of optimum currency areas. It shows how since the turn of the millennium a too expansionary monetary policy contributed to unsustainable over-investment booms in the periphery of the European Monetary Union, and more recently in Germany, dependent on the national fiscal policy stances. It is argued that the ECB's ultra-loose monetary policy as a crisis therapy puts a drag on long-term growth by conserving distorted economic structures. To preserve political stability a timely exit from the ultra-expansionary monetary policy is postulated.

Keywords: Hayek, Mises, European Monetary Union, European Central Bank, monetary overinvestment theory, optimum currency areas, fiscal policy, asymmetric shocks, secular stagnation

JEL Classification: E520, E580, F420, E630