One of the criticisms of the euro is that it imposes a 'one-size-fits-all' interest rate on every country in Euroland, regardless of the economic position of each individual country. Almost five years into the euro project, how has the one-size-fits-all interest rate worked for the seven main Euroland countries so far?
Every month, we estimate the interest rate, which each of the seven largest Euroland countries would set if left to its own devices based on their own economic needs. We use the ‘Taylor Rule’ for this purpose, which expounds that the optimum interest rate for an economy can be arithmetically calculated with reference to the economy’s inflation rate and the economy’s position in the economic cycle.
The ECB interest rate appears to have worked best for France. Germany has been saddled with an interest rate far higher than it needs, contributing to overall economic malaise, while inflationary Netherlands and Spain have had interest rates too low for them.
The ECB interest rate, having been seriously inappropriate overall for countries representing around half of Euroland’s economy, deserves a progress report along the lines of ‘not working too well, could do much better’.
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