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Fixing the Euro’s Original Sins: The Monetary - Fiscal Architecture and Monetary Policy Conduct

Fixing the Euro's Original Sins

Since its creation in 1999, the euro zone has been burdened by twin problems: rupture of the money–fiscal policy link and adoption of neoliberally designed monetary policies. These issues have contributed to generating dismal economic outcomes, which have fostered ugly political conditions that echo the 1930s and risk causing the euro to disintegrate. Thomas Palley analyzes politically viable approaches for changing the design of euro zone monetary policies and for restoring the capability of euro zone countries to operate effective fiscal policies.


The euro zone (EZ) was created in January 1999. Its weak economic performance is significantly due to the euro’s neoliberal monetary architecture and the design of monetary policy. Those features undermine national political sovereignty and consign the EZ to severe economic under-performance, which in turn fosters political demands for exit from the euro. Escaping this dynamic requires restoring fiscal space to EZ countries, and also changing the design of EZ monetary policy. The paper shows how this can be done. It decomposes the challenge of reform into generic problems related to the neoliberal construction of monetary policy, and specific problems concerning the euro as a currency union. The currency union problems are further decomposed into money – fiscal policy architecture problems and specific monetary policy conduct problems.

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