Keynes and the Eurozone’s Crisis
Dept. of Political Science & International Relations, University of Peloponnese, Corinth, Greece
Tel.: +30271040040, fax: +30271040050
The majority of the peripheral member states of the Eurozone Portugal, Italy, Spain, and Greece have experienced financial crises. Until now, the European leaders attempted to solve the crises mainly through austerity measures. For them, either it is an ideological or a political matter; the answers have identified with the free market beliefs. In this paper, we will argue that until now all the solutions that have been agreed on the European level do not help to solve the root causes of the Greek financial problem. The national governments of the European Union do not follow any of the Keynesian ideas to overcome the crisis. The European leaders seem to have forgotten their role to act as a policy makers. Under these conditions, even if the Greek financial problem can be moderated, it cannot be solved. The above observation is highly significant for the future of the European Union because every currency union in order to survive needs a mechanism of fiscal transfers. This mechanism does not exist in the Eurozone. Thus, this crisis will continue to affect the performance and function of the EU.
Key words: Political Economy, Greek Crisis, Eurozone, Keynes.
The European leaders attempted to solve the European crisis mainly through austerity measures. For them, either it is an ideological or a political matter; the answers have identified with the free market beliefs. This laissez faire approach has generated severe social, political, and economic phenomena within the member states. The effective demand in each peripheral economy shrunk, creating waves of pessimism, unemployment and misery. How has the European Union (EU) responded to the severe crisis? As the Greek case shows, the solutions to overcome the crisis have nothing to do with the most important problems that the member states confront. This paper argues that even though the last four years many things have changed in the field of European economic governance, the most important flaws today remain unsolved. In this regard, the ideas of John Maynard Keynes are needed to be remembered. Almost all the efforts of European leaders to resolve the Eurozone’s crisis are not related to the development of effective policies for the weak peripheral member states. The EU does not follow any of the Keynesian ideas in order to overcome the crisis. Thus, the political economy of austerity does not provide an adequate solution for the peripheral member states like Greece. A new approach for the European economic governance is needed.
This paper is organized as follows. In the first section, the main theoretical arguments of John Maynard Keynes will be presented. It will then proceed with the analysis of the main vulnerabilities and the main gaps that can be identified at the European level. The third section will examine the most important events of what we call Greek story. Finally, it will conclude with policy proposals according to Keynesian rationale.
2. The Keynesian rationale
The global financial crisis suggests that government intervention may be necessary as the market players cannot form correct perceptions about the direction of the economy. In this regard, Keynes has an unambiguous role to play. In his writings, Keynes has already provided the missing theoretical link that connects diagnosis and treatment (Skidelsky 2010). Keynes based his arguments on two important variables namely employment and economic growth. At the core of his theory one can make notice of the uncertainty about the future (Keynes 1921). Uncertainty is not only the main reason for the instability of the economies but also hinders the recovery from financial crises.
Keynes also believed that a great economic recession was always possible in a...
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