Inflation and the Euro

The National Review has a rather interesting, albeit somewhat technical (part of my grad school prep), article on the Euro as a case study for the effect of monetary supply and economic activity on inflation. I have always maintained that Greenspan, although he has done a pretty good job, is way too paranoid about wage pressure's effect on inflation, and as a result helped cause the 2001 recession through excessive rate hikes. This article doesn't address that directly, but I feel somewhat vindicated.

Even though inflation is undeniably a monetary phenomenon, a shocking number of policymakers at the Federal Reserve and other institutions ’round the globe still cling to the view that “too much” economic activity is the culprit. For them, inflation’s akin to steam issuing from the radiator of an overheated engine. Thankfully, a test of the thesis is now readily available in the form of Nobel laureate economist Robert Mundell’s invention — the euro.

In sharing a common currency, the dozen member states of Europe’s Economic & Monetary Union (EMU) are governed by the same monetary policy (much like the 50 states of the U.S.), but this uniformity doesn’t stretch to all policy matters. The economic, regulatory, and fiscal regimes of EMU countries, while reflecting certain unifying directives from Brussels, don’t necessarily align, and the differences, particularly as regards taxation, often bear directly on economic growth. The eurozone thus can serve as a sort of proving ground of economic and monetary theory.