Thursday, November 15, 2012

An Alternative Vision for the Eurozone Crisis

The Eurozone crisis has been reduced, according to the mainstream diagnosis, to a fiscal crisis caused by excessive public spending and a competitiveness gap between North and South. The mainstream solution is to close this gap by means of ‘expansionary fiscal austerity’ and wage reductions. This has been admitted even by the IMF to be a dead end.

In our opinion the root of the Euro crisis lies in both the inadequate institutional set up of the Eurozone, which lacks a genuine lender of last resort and sufficiently coordinated fiscal and wage policies, and on an over-liquid and under-regulated international financial market that was more than happy to finance any imbalance - no matter how unsustainable it was.

What we had in Continental Europe were mutually dependent models of growth. The mercantilist export-led growth of the North could not have been sustained without a (remarkably easy-to-finance) debt-driven model in the South, accumulating trade deficits and private and public debt. In the aftermath of the financial crisis, the private debt was turned into sovereign debt. The Irish case is an extreme example of this process. The ensuing austerity policies enforced upon the governments increased unemployment to a socially unacceptable level. If continued these policies will lead to a prolonged depression and even more social unrest.

European institutions were and still are not able to deal with such structural imbalances in an adequate way. Mass unemployment and social deprivation resulting from austerity policies is threatening the survival of democracy in the European Union.

Alternative perspectives
On the basis of our diagnosis we are convinced that Europe should reverse the current austerity policy regime. This would require profound institutional and policy change.

In terms of monetary policy, we believe that ECB should act as a credible lender of last resort to relieve the sovereign debt crisis. Strict regulation of financial markets is a further step, and it is necessary to separate investment banking from commercial banking.

In terms of fiscal policy, the link between the ECB and fiscal conditionality should be fundamentally changed. Monetary policy should support and accommodate progressive fiscal rules aiming at employment creation and growth. Budget deficits can only be consolidated in a growing economy.

These growth stimulating policies are consistent with the desired long run stabilization of debt-to-GDP ratios. In the present situation of mass unemployment, these policies do not carry a significant risk of inflation.

We also believe that the adjustment has to be supported by stimulation of consumption via higher wages starting from the core surplus countries (like Germany) where wage restraint policies have considerably contributed to the growing income inequalities and current account imbalances in the Eurozone.

If the German finance minister believes in what he said, that no country can live forever beyond its means, then it must also be clear that no country can live indefinitely below its means. This implies that the change in the wage policy in Germany has to be an important part of the solution.

Mutual prosperity of the Eurozone countries and their citizens through demand expansion, rather than demand contraction through fiscal consolidation for the benefit of high finance, must be recognized as the imperative for the political viability of the Euro project. We must have the intellectual honesty and courage to act accordingly.

Signed by


Amit Bhaduri
Jawaharlal Nehru University, New Delhi, India

Thomas Boylan 
National University of Ireland, Galway, Ireland

Sergio Cesaratto 
Università degli studi, Siena, Italy

Nadia Garbellini 
Università degli Studi di Pavia, Italy

Torsten Niechoj 
Rhine-Waal University of Applied Sciences, Kamp-Lintfort, Germany

Gabriel Palma 
University of Cambridge, UK

Srinivas Raghavendra 
National University of Ireland, Galway, Ireland

Rune Skarstein 
Norwegian University of Science and Technology, Norway

Herbert Walther 
Vienna University of Economics and Business, Austria

Ariel L. Wirkierman 
Università Cattolica di Milano, Italy

Kazimierz Laski 
University of Linz, Austria 

Corresponding author: Srinivas Raghavendra  (


  1. I'll say something polemic. Theoretically, if somebody claims that rising wages in Germany (and I totally favor that, I'm pro increased wages in Germany) will solve the TRADE imbalances with the European periphery (that's the usual argument in its favor, for its impact on unit labor cost), then the same applies for a reduction in Greek wages (or other countries in the periphery). This is false, and the last data has shown that.
    Even if the effect is to lower German surplus, the benefited countries will hardly be those of the periphery. Perhaps a few more Germans will go to Greece or Spain, but it won't be relevant. The benefited countries will be China, Russia, and other with really low wages, not Greece or Spain.
    The problem is structural competitiveness, not price competitiveness. Greece simply doesn't produce almost anything. The Spanish is a low competitive economy. Only Italy can compete (and not with this interest rates) on a par, and still the problem there is structural.
    I'm in favor of Greece leaving the Euro. I think they should make a sharp and big devaluation (because like I said, price elasticities are low, and even a moderate devaluation will not help). But if the objective is to keep everybody inside the Euro, a Marshall Plan is a must. And the same goes for something like Keynes's proposal for recycling current account surplus. I support wage increases in Germany, but that will not solve the imbalances with the periphery.

    1. Not sure that it is that polemic. Yes, once you have a Free Trade Area, there will be concentration of industry in certain places (the rust belt effect). I guess what they meant by higher wages in Germany is less about competitiveness, and more about expansion of demand in Germany. More demand in Germany may lead to higher levels of employment in the whole eurozone. And as Pablo Bortz noted in a twit also more fiscal transfers would be necessary. Like in the US.

  2. I think there should be some law that "forces" countries like Germany to have importation program on greek and peripheric products, that of course if the view of an ignorant student in my first year of economics, what do you think?

    1. That wouldn't work but larger fiscal transfers are normal in federal unions.

  3. I think I am starting to believe in conspiracies, honestly. It might sound silly, but the amount of bubble crises after the "stagflation" that ended most of keynesian policies over the world (1 crises in 30 years of biggest growth is hardly a bad number) is astonishing, and they all have pretty much the same reasons.

    I was watching a video the other day of our ex-president Fernando Henrique in a reunion with Clinton and others, almost begging on his knees for some regulation on leveraging in finance markets after the Asian crises that affected Brazil and other innocent countries. So, what I mean is, even neoliberals had no doubt that it was a deregulation problem, now that the crises is affecting central countries, neoclassicals are trying to save themselves blaming it on "THE GOVERNMENT!111111" or "fiscal irresponsibility" Oh so now that it is a more "relevant" crises you try to make up lies?

    I really really doubt this was unpredictable.. there is a will in this crises, I am almost sure. Something has to be done, and we all know, in the end, somehow, the left wins. So that makes me calmer (french revolution, slavery, etc)


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