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The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective July 11, 2011

The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective July 11, 2011

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Published by ddufourt
Eckhard Hein, Achim Truger, Till van Treeck
The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective
July 11, 2011
Hans-Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung Working Paper n°9, 2011
Eckhard Hein, Achim Truger, Till van Treeck
The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective
July 11, 2011
Hans-Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung Working Paper n°9, 2011

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Working Paper
Hans-Böckler-Straße 39D-40476 DüsseldorfGermanyPhone: +49-211-7778-331IMK@boeckler.dehttp://www.imk-boeckler.de
The European Financial and Economic Crisis:Alternative Solutions from a(Post-) Keynesian Perspective
Eckhard Hein, Achim Truger, Till van Treeck
July 11, 2011
9/2011
 
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The European Financial and Economic Crisis:Alternative Solutions from a (Post-) Keynesian Perspective
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Eckhard Hein, Achim Truger, Till van Treeck
Abstract:
The financial and economic crisis in the Euro area has revealed a number ofimportant flaws in the economic policy framework in Europe. On the one hand, theimbalances, which have dominated European development since the introduction of theeuro, are not sustainable; and this is more serious in a period of crisis in particular. On theother hand, it has become clear that the Euro area suffers from a serious lack of institutionsand policy concepts, which will not allow coping with deep financial and economic crisesunless a deep restructuring takes place. The policy reactions of European governments, theEuropean Commission and the European Central Bank in cooperation with the IMF will,therefore, hardly be able to initiate recovery. On the one hand, some important steps towardsfinancial stabilisation have been made. On the other hand, however, these are combinedwith restrictive fiscal and wage policies, which will impose deflationary pressure on majorparts of the Euro area and thus prevent stabilisation (or reduction) of public debt-GDP ratios.In the paper we will first analyse the imbalances, which have been built up in the Euro area,before we briefly review the policy responses towards the crisis. Since the prescribed fiscaland wage policies are still dominated by the New Consensus Macroeconomics theoreticalframework, we will then develop an alternative macroeconomic policy model based onKeynesian and Post-Keynesian principles. It will be shown that stabilising wage and activefiscal policies will have major roles to play in order to cope with the imbalances and to initiaterecovery for the EU as a whole. Furthermore, current account targets will have to be includedinto intra-Euro area policy coordination.
Keywords:
European financial and economic crisis, current account imbalances, Post-Keynesian economic policies
JEL code:
E20, E61, E63, E64, E65, E66
Prof. Dr. Eckhard Hein Dr. Achim Truger / Dr. Till van TreeckBerlin School of Economics and Law IMK in der Hans-Böckler-StiftungBadensche Str. 50-51 Hans-Böckler-Straße 3910825 Berlin / Germany 40476 Düsseldorf / Germanye-mail:eckhard.hein@hwr-berlin.dee-mail:Achim-Truger@boeckler.de /  Till-van-Treeck@boeckler.de
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For most helpful research assistance we would like to thank Nina Dodig and Gregor Semieniuk.
 
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The European Financial and Economic Crisis:Alternative Solutions from a (Post-) Keynesian Perspective
1. Introduction
The European Union and the Euro area are presently facing the most serious crisis since theintroduction of the euro in 1999. As a consequence of the world wide financial and economiccrisis, which started in 2007 in the US and rapidly spread over major parts of the worldeconomy, Greece in early 2010, Ireland in late 2010 and Portugal in early 2011 were the firstthree Euro area economies with serious public debt problems. These problems triggeredmassive increases in interest rates on public debt of these economies and finally public debtcrises with rescue measures introduced by the European Union member countries togetherwith the IMF. The financial and economic crisis in the Euro area has revealed a number ofimportant flaws in the economic policy framework in Europe. It has become clear that theEuropean Union and the Euro area suffer from a serious lack of institutions and policyconcepts. In particular, there are no efficient mechanisms designed to prevent the building upof external macroeconomic imbalances across Euro area countries. The current debate overa reform of the Stability and Growth Pact, and the economic policy framework more broadly,is still dominated by the paradigm that has led to the crisis. Despite the recognition thatcurrent account imbalances contributed to the crisis, the policy reactions of Europeangovernments, the European Commission and the European Central Bank are stillcharacterised by a narrow focus on public deficits and debt. At the same time, there is acontinued call for intensified deregulation of labour and product markets, in an attempt toraise the ‘competitiveness’ of the Euro area as a whole. These measures are conceptuallyflawed and will, therefore, hardly be able to initiate recovery. Some important urgencymeasures have been taken to stabilise financial markets and prevent government defaults, inparticular the European Financial Stability Facility (EFSF) as well as the European FinancialStabilisation Mechanism (EFSM), and the European Stability Mechanism (ESM), which willassume the role of providing external financial assistance to Euro area member states introuble after June 2013. However, these measures are combined with restrictive fiscal andwage policies associated with the access to the EFSF and the ESM, a tighter Stability andGrowth Pact (SGP) and a new ‘Euro Plus Pact’,
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which will impose deflationary pressures onmajor parts of the Euro area and will thus prevent stabilisation (or reduction) of public debt-GDP ratios. Unless the structural causes for the public debt and euro crises, i.e., the causesfor the external imbalances, are overcome, the Euro area will continue to face serious threatsof deflationary stagnation and a collapse of the euro as a common currency.
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See the conclusions of the meeting of the European Council (2011) in March 2011.

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