Sunday's agreement between the Greek government and its principal creditors prevented a large-scale debt default and preserved the integrity of the European Monetary Union, at least for now. The long-running crisis, however, has left the Greek economy in shambles and re-exposed ugly nationalistic rivalries that European unification was supposed to have buried forever.

For all this, there is plenty of blame to go around. Of course, Greece should not have over-borrowed in the first place. The creditors probably should not have pushed so hard in their negotiations, imposing demands that sometimes seemed to threaten basic elements of Greek sovereignty. Less widely recognized, but quite important nonetheless, is the role played by the European Central Bank's grossly miscalibrated monetary policy, which greatly exacerbated the European debt crisis.

In Europe, as in the United States, interest rates lie very close to zero. Ordinarily, very low interest rates signal that monetary policy is highly accommodative, as it should be during times of economic and financial distress. When deflationary expectations take hold, however, as they certainty have in Europe, low interest rates can signal, instead, that monetary policy is far too restrictive. Under these circumstances, unusually slow growth in the money supply provides a more reliable signal of tightness. And indeed, in Europe, the M3 measure of the money supply, a sum of currency, bank account balances, and other highly liquid assets, hardly grew from mid-2009 through the end of last year.

The pressures applied by more than five years of severe monetary restraint harmed the Greek economy in two ways. First, unexpectedly slow money growth deepened and prolonged the recession that accompanied the debt crisis. Against the backdrop of falling income and employment, even the harsh austerity measures that Greece adopted could do little to restore fiscal balance and stem the rising tide of indebtedness. Second, slow money growth led to sustained periods during which European inflation fell well short of the ECB's target, which is set below, but close to, two percent per year. This low inflation added to Greece's debt burden, by requiring payments of interest and principal to be made with Euros worth considerably more than anticipated.

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Milton Friedman famously advocated a "k-percent rule" for monetary policy, according to which price stability is maintained through steady growth of the money supply at the rate of k percent per year, where k is a modestly positive number. While Friedman acknowledged that, in theory, monetary policy might be used more actively to fine-tune the economy, he also observed that, in practice, deviations of money from a fixed growth path usually make economic fluctuations worse, not better. Proving Friedman's point, the monetary dynamics seen recently in Europe — extremely low interest rates, accompanied by very slow money growth and inflation, stagnating incomes and employment, and rising defaults and bankruptcies — are similar to, although not as severe as, those experienced worldwide during the Great Depression of the 1930s.

There are now some glimmers of hope. With the deal, Greece has time to implement essential reforms for rebuilding its economy. And in January, the ECB finally embarked on a program of quantitative easing, allowing money growth to revive. Operating with a lag, this more normal money growth should contribute to an accelerating economic recovery later this year, not only in Greece, but also throughout all of Europe. Still, the Greek debt crisis highlights the extraordinary costs — economic, social, and political — of monetary instability. Tragedy results when central bankers neglect their principal duty: to stabilize money and prices.

Peter Ireland is a member of the Manhattan Institute's Shadow Open Market Committee and a professor of economics at Boston College. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.