The Eurozone in Crisis — A Kaleckian Macroeconomic Regime and Policy Perspective

ABSTRACT

The current Covid-19 Crisis 2020 has hit the Eurozone in a highly fragile situation, with a weak and asymmetric recovery from the Great Financial Crisis, the Great Recession and the following Eurozone Crisis. These crises have revealed the weaknesses of the macroeconomic policy institutions and strategies of the Eurozone based on New Consensus Macroeconomics (NCM). Applying a Kaleckian/post-Keynesian analysis of the demand and growth regimes to the EA-12 countries, we show that the internal imbalances within the EA-12 before the Eurozone have been externalised since then. Most of the countries and the EA-12 as a whole have now turned export-led mercantilist and thus highly vulnerable to fluctuations in world demand. For an economic policy alternative we turn towards Kalecki’s macroeconomic policy proposals for achieving and maintaining full employment in a capitalist economy by government deficit expenditures, in combination with re-distribution policies in favour of labour and low-income households, assisted by central banks targeting low interest rates. This approach is then applied to the Eurozone, in order to derive a policy mix which should contribute to a more rapid recovery from the Covid-19 Crisis and to a medium- to long-run non-inflationary full employment domestic demand-led regime.

KEYWORDS:

• Eurozone crisis
• Kalecki
• demand and growth regime
• macroeconomic policies

JEL Codes:

• E11
• E12
• E61
• E63
• E65

Acknowledgements

For helpful comments, we are grateful to Daniel Detzer, Ryan Woodgate and to the participants in the online Poznań Conference on Kalecki and Kaleckian Economics in the 21st Century, 24–26 September 2020. We have also benefitted from the comments and suggestions of an anonymous referee. Remaining errors are ours, of course.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 See also Hein (2019), Hein and Mundt (2012), Stockhammer (2010, 2012, 2015), van Treeck and Sturn (2012), the contributions in Hein, Detzer, and Dodig (2015, 2016), and several others. These macroeconomic features of financialisation have been derived from the broad and extensive literature on changes in the structure, institutions and power relationships in modern capitalism since the early 1980s. Some recent overviews can be found in Guttmann (2016), Palley (2013), Sawyer (2013) and van der Zwan (2014).

2 Econometric research based on demand-driven post-Kaleckian distribution and growth models has shown that most of the advanced capitalist economies, including the EU-15, tend to be wage-led, that is a falling wage share will dampen aggregate demand and growth (Hartwig 2014; Onaran and Obst 2016; Onaran and Galanis 2014).

3 For a derivation of these regimes in simulated stock-flow consistent models see Belabed, Theobald, and van Treeck (2018) and Detzer (2018), and for a stylized Kaleckian model see Hein (2018b).

4 Greece joined in 2001.

5 For detailed analysis of the crisis processes in individual countries, see for example the contributions in Arestis and Sawyer (2012) and in Hein, Detzer, and Dodig (2016).

6 It should also be noticed that even in the first period we are considering, the financial balances of the corporate sectors had been positive in several Eurozone countries.

7 The phenomenon of weak investment and growth has given rise to re-emergence of a debate on ‘secular stagnation’ (Summers 2014, 2015; Hein 2016).

8 The extremely high growth rates for Ireland seem to be driven by severe accounting problems in a country with a high relevance of foreign owned companies (Joebges 2017).

9 See Hein (2018c) for a recent comparison of Kalecki’s and Keynes’s – as well as Marx’s – principle of effective demand. For a recent intellectual biography of Kalecki, see Toporowski (2013, 2018). For an excellent introduction into Kalecki’s economics, see Sawyer (1985), and for macroeconomic textbooks based on Kalecki’s economics, see Bhaduri (1986) and Łaski (2019). For further references on Kaleckian economics, including further intellectual biographies, see Hein (2014, Chapter 5).

10 We thank Malcolm Sawyer for clarifying this issue in private communication.

11 For an elaboration on Steindl’s notion of stagnation as a political trend and its application to stagnation policies in the Eurozone, see Hein (2018a).

12 This section is based on Hein (2018a). For more extensive elaborations of the approach see Hein and Detzer (2015b).

13 See Hein and Detzer (2015b) for a broader review.

14 Of course, if the private sector is in deficit and the current account is balanced, the government sector has to be in surplus.

15 For recent derivations of this condition in Kaleckian distribution and growth models driven by autonomous and deficit financed government expenditure growth, see Dutt (2020), Hein (2018d) and Hein and Woodgate (2020).

16 Furthermore, it is not clear, how such an approach should contribute to rebalancing the Eurozone. For a discussion and comparison with what is proposed here, see Hein and Detzer (2015b).

17 See Hein and Detzer (2015b) for a more detailed derivation of the conditions.