This commentar yis an excellent summary of the fundamental issue in the euro zone crisis that is often lost sight of in the face of a flurry of news about fiscal authorities struggling with forces beyond their control:



The euro zone recession is fundamentally due to a lack fo demand and the main lever to stabilize aggregate demand is NOT fiscal policy but monetary policy. However, the ECB's words and the confusing semi-federalism of EU institutions have successfully led commenters to focus on the national institutions that corresponf to the electorate's consciousness and national politics: fiscal policy, austerity, welfare states, current account deficits are all over the editorials of major European newspapers, although any commentary on the crisis should be dominated by three letters: ECB.



This blind spot perhaps explains the only omission in this excellent essay by Eichengreen. He notes:



"The ECB’s surprise liquidity operation put the continent’s crisis on hold. But now, just fourth months later, matters are again coming to a head. The big southern European countries, Spain and Italy, battered by austerity, are spiraling into recession"



Most other news sources are less subtle and speak of the ghastly "financial markets" that had allegedly been lulled in by ECB liquidity operations and now, like a stunned beast whose anesthetics are wearing off, are lashing out again at struggling Southern European sovereigns. To hear intelligent people write like that, one can only surmise that the efficient market hypothesis has abandoned European journalism.



Here is an actual theory, not based on mythical beasts, to explain the return of the recession in Europe that seemed to have been almost defeated 5 months ago: The ECB steers the nominal income of the euro zone. The LTROs signalled to market participants that maybe there was still someone in Frankfurt who cared about unemployment, misery and political unrest more than about short-term inflation being slightly above the promised level.



Then, the LTROs stopped and it became clear that the ECB was not willing to do the right thing in the face of ideological resistance from the German economic establishment. Moreover, the ECB's unwillingness to stimulate the euro zone economy became clearer through serious, but quite laughable, suggestions by Jörg Asmussen, German representative on the ECB Executive Board, that it was time for the ECB to start raising interest rates soon (because the EU euro zone economy is flourishing ?) and that last year's interest rate rise in the spring had been just as necessary. Unfortunately, he is terribly wrong: after last year's interest rate rise, the ECB soon had to reverse itself because the economy collapse and given where we are at right now...."success" is not the word that comes to mind.



To summarize: Bravo for a great and lucid essay by Barry Eichengreen - one of few commentators who understands that the dragon's lair may be in Frankfurt, but it is not the Deutsche Börse...