keynisian and euro zone crisis

Topics: European Union, Keynesian economics, Institutions of the European Union Pages: 27 (3669 words) Published: November 29, 2013
Keynes and the Eurozone’s Crisis

Georgios Maris
Ph.D. Candidate
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...

References: Alogoskoufis, G. (2009). Greece after the crisis. Athens: Kastaniotis [in Greek].
Buzaglo, J. (2011). “The Eurozone Crisis: Looking through the Financial Fog with
Keynesian Glasses”, Real-World Economics Review, 58, 77-82.
Council of the EU, (2009). Council Opinion on the Updated Stability Programme of
Greece, doc 7316/09 (10/03/2009).
Darvas, Z., Pisani-Ferry, J. and Wolff, G. (2013). Europe’s Growth Problem (and
what to do about it), Bruegel Policy Brief, Issue 2013/03, April.
De Grauwe, P. and Yuemei, J. (2013). More Evidence that Financial Markets
Imposed Excessive Austerity in the Eurozone, CEPS Commentary, February.
Dibooglu, S. and Horvath, J. (1997). “Optimum Currency Areas and the European
Monetary Unification”, Contemporary Economic Policy, 15:1, 37–49.
Eichengreen, B. (1991). “Is Europe an Optimum Currency Area?”, NBER Working
Paper, No
Eleytherotipia, (2008). Acknowledgment of Responsibilities Months Later,
Eleytherotipia, 16 December
EUCE, (2012)
European Commission, (2007). Recommendation for a Council Decision Abrogating
Decision 2004/917/EC on the Existence of an Excessive Deficit in Greece, SEC
(2007) 620 Final.
Gros, D. (2013). The Austerity Debate is Beside the Point for Europe, CEPS
Commentary, May.
Kaplanoglou, G. and Rapanos, V. T. (2012). “Tax and Trust: The Fiscal Crisis in
Greece”, South European Society and Politics, 1-22.
Keynes, J. M. (1921). A Treatise on Probability. New York: AMS Press.
Keynes, J. M. (1982). Activities 1931-1939: World Crises and Policies in Britain and
Keynes, J. M. (2001). The General Theory of Employment Interest and Money.
Ministry of Economics, (2009). Updated Stability and Growth Programme 20082011, Hellenic Republic, January.
Mitsopoulos, M. and Pelagidis, T. (2012). Understanding the Crisis in Greece.
Monastiriotis, V. (2011). “Making Geographical Sense of the Greek Austerity
Measures: Compositional Effects and Long-run Implications”, Cambridge
Skidelsky, R. (2010). Keynes: The Return of the Master. New York: Public Affairs.
Sklias, P. and Maris, G. (2013). “The Political Dimension of the Greek Financial
Crisis”, Perspectives on European Politics and Society, 14:1, 144-164.
Standard & Poor’s, (2012). Economic Research: The Eurozone’s New RecessionConfirmed, Standard & Poor’s Rating Services, September.
Varoufakis, J. (2012). The Global Minotaur. Athens: Livani. [in Greek].
Verdun, A. (2007). “Economic and Monetary Union”, in M. Cini, (ed.), European
Union Politics
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Euro Zone Crisis Essay
  • Euro Zone Crisis Essay
  • Euro-Zone Crisis and Its Impact on India Essay
  • Essay about Euro Zone
  • Euro Crisis Essay
  • Euro Crisis Essay
  • Essay about Entrance in euro zone for Greece
  • The Effect of Euro Crisis on India Essay

Become a StudyMode Member

Sign Up - It's Free