Monetary policy in in Europe is constrained by legal and political constraints on the ECB. The ECB has not been able to use policies like those used by the US Federal Reserve to restore growth. The head of the ECB stated that fiscal policies were needed to prevent deflation. However, he has the wrong idea about which fiscal policies are needed. He supports structural changes that would increase flexibility in labor markets; he also would like to see educational reform. Such changes might be useful in Europe that they take a long time to work their magic. Europe suffers from a continuing decline in aggregate demand. That requires fiscal policies that will stimulate growth in the short term. That kind of fiscal policy is not on the agenda in Europe.
Monetary policy is effective in controlling inflation. It is less effective in reversing a deflationary trend. If Europe falls into deflation it will be due to policies that limit the use of fiscal policy.
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