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European economic governance: the Berlin-Washington consensus

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This paper argues that the European Union has gone farther than any other country or institution in internalizing the prescriptions of the Washington Consensus.Embedding neo-liberal principles in the treaties defining its governance,the EU has enshrined a peculiar doctrine within its constitution. We further argue that this "Berlin-Washinghton Consensus" has serious empirical and theoretical flaws, as its reliance on Pareto optimality leads to neglect the crucial links between current and potential growth. We show by means of a simple model that the call for structural reforms as an engine for growth may be controversial, once current and potential output are related. We claim that adherence to the Consensus may go a long way in explaining the poor growth performance of the European economy in the past two decades, because of the constraints that it imposed on fiscal and monetary policies. The same constraints have deepened the eurozone crisis that started in 2007,putting unwarranted emphasis on austerity and reform. Challenging the Consensus becomes a precondition for avoiding the implosion of the euro,and recovering growth.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2012-20.

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Date of creation: Jun 2012
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Handle: RePEc:fce:doctra:1220

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Keywords: Washington consensus; Neoclassical theory; Austerity; Structural reforms; Fiscal policy; Monetary policy; EU governance; ECB; Stability and growth pact; Fiscal compact;

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Wanted: German Inflation
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2014-03-06 22:00:13
  2. Ancora dieci anni di crisi per riequilibrare l’eurozona?
    by keynesblog in Keynes Blog on 2014-03-07 14:30:38
  3. Should Paris Go East?
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-12-06 13:55:56

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