Hayek’s Overinvestment Theory and the Stability of the Euro Area

Gunther Schnabl

A chapter in The Emergence of a Tradition: Essays in Honor of Jesús Huerta de Soto, Volume I, 2023, pp 293-305 from Springer

Abstract: Abstract In the face of rising inflation and envisaged interest rate increases by the European Central Bank, concerns about the stability and possible breakup of the euro area are growing. The paper scrutinizes the stability of the euro area based on Mundell’s theory of optimum currency areas and the overinvestment theory of Hayek. It is argued that idiosyncratic business cycles which became amplified by uncoordinated fiscal policies were at the roots of the European financial and debt crisis. Since then, the monetary and fiscal rescue measures have led to growing disparities in the euro area, low growth, and rising inequality, contributing to growing political instability and undermining the credibility of the European Central Bank. A return to a stability-oriented monetary policy is recommended to stabilize the euro area in the long term.

Keywords: Hayek; Mises; European Monetary Union; European Central Bank; Monetary overinvestment theory; Optimum currency areas; Fiscal policy; Asymmetric shocks (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-17414-8_23

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DOI: 10.1007/978-3-031-17414-8_23

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