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A big problem with the eurozones one-size-fits-all monetary policy is that it risks fitting nobody. That, indeed, was a key cause of the crisis. Early in the century, countries such as Spain and Ireland were booming, while Germany was in the doldrums. Setting interest rates at a level that worked well for the eurozone on average had the effect of inflating the Spanish and Irish property bubbles while pushing up wages so their economies became uncompetitive. When the bubbles burst, the damage was devastating.
It would be hard to argue that any part of the eurozone is currently booming. Even Germany will eke out GDP growth of only 0.3% this year, according to the International Monetary Fund. But it may not be long before the problems of a one-size-fits-all monetary policy are back to haunt the zone. Even though the German economy isnt growing strongly, it is still outperforming the average. Whats more, labour is in short supply in Germany and house prices are rising at a moderate clipa big contrast to the average, let alone recession-inflicted countries such as Italy.
The European Central Banks policy of keeping interest rates at the current 0.5% level or lower for an extended period is right for the eurozone on average. The weaker countries would benefit from even looser monetary policy. Germany, though, may already need something tighter. If the extended period of low interest rates goes on for years, it could experience a boom.
Many observers view one-size-fits-all interest rates as one of the zones design defects, about which nothing can be done. Others advocate policiessuch as full fiscal unionwhich are not going to be adopted and wouldnt really hit the spot even if they were. But the outlook isnt quite so pessimistic. There are two policies that could mitigate considerably the damage of the single monetary policyand they dont even require any treaty changes.
The first is for eurozone countries to pursue vigorous macroprudential policies. Since Lehman Brothers went bust five years ago, it has become fashionable to call for bank regulators to have the tools to prevent future bubbles. The main idea is that they should be able to stop credit and asset prices growing too fast by directly intervening in the way banks lend. One way of doing this would be to jack up the minimum capital buffers banks have to hold if the economy is overheating; another would be to cut