They are unwilling to abandon their socialist principles and their electoral bases by cutting tax rates, making their labor markets more flexible or engaging in other supply-side programs. Maastricht, meanwhile, limits their ability to use fiscal stimuli to reflate their economies. Pressure is building for easier money. The claim is that still lower rates will encourage investment. But in the core of Europe, high wage costs and social insurance taxes make new investment uneconomic.
Monetary stimulus is unlikely to work.
A weaker euro is one way of cutting real wage and benefit costs relative to global competition without actually asking workers to take a cut. But success at making the euro a global reserve currency requires that the currency be trusted as a store of value. To date, holders of the euro have lost both interest income and foreign exchange value relative to holders of the dollar. Political pressure for interest-rate cuts only makes the euro less plausible as something that will hold its value, the more so given the unlikeliness that the U.S. Fed will further reduce rates. Europe's banking sector has been severely weakened by losses in Eastern Europe, Asia and Latin America.