Paul Krugman: "What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.
Policy improved after that, with Mario Draghi’s “whatever it takes” stabilizing bond markets and a leveling off of austerity. But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels, pushed inflation down by around a percentage point, and created enduring weakness — because it’s really hard to recover from deflationary mistakes when you’re in a liquidity trap.
Oh, and America might have turned European too if the Bernanke-bashers of the right had gotten what they wanted."
Read his blog here.
Should we blame Germany for the ECB's refusal to do its job as lender of last resort?
It's frightening to think that policy errors can create enduring weakness. But well, many wars can be attributed to policy errors as well.