Introduction:

At the end of the year 2006, the good news about Euroland?s economic fortunes seemed to abound: unemployment fell to a record low of 7.5 per cent while budget deficit ratios were declining, as GDP growth reached 2.5 per cent and inflation finally dropped below the ECB?s two-per cent tolerance ceiling. Newspaper reports and market analysts referred to a ?Goldilocks recovery?.1 And EU Commissioner Almunia was quick to assert that Euroland was now ?reaping the benefits of reform? (FT.com 2006a, 28 September).

Seen from a global perspective, though, Euroland?s performance including its supposed ?Goldilocks recovery? of late looks anything but impressive. In fact, Euroland stands out as the only major region that did not participate in the global boom that had started in 2002. With the US acting as its prime engine and China ? due to the dollar-peg ? as a kind of back boiler, record growth spread throughout Asia and the emerging world at large. Even deflationary Japan grew faster than Euroland, where recovery only took hold in 2006 following a period of protracted stagnation.

Ironically, as the world economy enjoyed a record five-year span of economic growth, Euroland seemed like an ?island of stagnation?; con-tradicting the long-held aspiration to become an ?island of stability? (and growth) that had inspired the ?stability-oriented? Maastricht regime.

The key turnaround occurred in Germany, the Euroland member country that had seen shrinking domestic demand for many years while actually benefiting the most from the global boom. In Germany, the export boom finally boosted corporate investment. Together with a revival in construction, that explained much of the improvement in the overall situation in 2006. The ?sick man of the euro? of 1999, who then enjoyed a sudden but brief burst of 3 per cent GDP growth in 2000, experienced another period of protracted stagnation (with ?bazaar economy? speculations about the country?s alleged lack of competitiveness and flexibility), followed by another export miracle.

A popular answer to the pressing question how Germany and Euroland managed to stagnate in the midst of a record global boom would blame it all on allegedly all-pervasive ?structural problems?. At the same time not few commentators have shown themselves willing to cheer the ECB?s brash campaign to stylise and celebrate itself as the ultimate monetary success story. In truth, however, yesterday?s attempts to shift the blame on structural problems while acquitting monetary policy in the face of protracted domestic demand stagnation remained just as unconvincing as today?s attempts to attribute the export-driven recovery to structural reforms. Among other things, such self-serving ?explanations? distract from the risk that the ECB may be in the process of repeating its earlier blunders: namely, cutting short a recovery for which it had done far too little to get off the ground in the first place.

The ECB is thereby also re-establishing well-known patterns of the past. For Euroland?s performance and emerging pattern of brief upswings, drawn-out stagnation, and overly reliance on external growth are not only the opposite of the US situation (characterised by long domestic demand driven upswings and brief downturns), but much resemble Germany?s patterns of the past. This should not come as a surprise either though as the ?Maastricht regime? ? dictating macroeconomic policies in Euroland since the 1990s ? is essentially of German design. Following Bundesbank traditions, the ECB stands at the helm of the seriously flawed Maastricht regime ? flawed since what used to work for Germany under peculiar pre-EMU conditions is bound to fail today for Euroland as a whole. As the analysis below attempts to show, a clean break with Bundesbank traditions is precisely what is required from the ECB to turn The ECB ? How much of a success story, really? 303 the euro into a real success. Euroland?s political authorities should encourage this necessary policy re-orientation through structural reforms of the Maastricht regime. As this chapter sets out to assess the ECB?s performance, section 2 begins with a brief summary of the Maastricht regime, highlighting its key flaws and the ECB?s centre position within it. Subsequent sections then investigate the ECB?s performance during the brief upswing of 1999-2000 (section 3), the drawn-out stagnation of 2001-05 (section 4), and the export-driven ?Goldilocks recovery? of 2006-07 (section 5). Our key finding is that the ECB has played a key role in Euroland?s uninspiring economic performance and is today running the risk of repeating its earlier blunders. Section 6 concludes the analysis.