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The Crisis of Finance-dominated Capitalism in the Euro Area: Deficiencies in the Economic Policy Architecture and Deflationary Stagnation Policies

  • Eckhard Hein

In this paper the euro crisis is interpreted as the latest episode in the crisis of finance-dominated capitalism. For 11 initial Euro area countries, the major features of finance-dominated capitalism are analyzed; specifically, the increasing inequality of income distribution and the rising imbalances of current accounts. Against this background, the euro crisis and the economic policy reactions of European governments and institutions are examined. It is shown that deflationary stagnation policies have prevailed since 2010, resulting in massive real GDP losses; some improvement in the price competitiveness of the crisis countries but considerable and persistent current account imbalances; reductions in government deficit-to-GDP ratios but continuously rising trends in gross government debt-to-GDP ratios; a risk of further recession for the euro area as a whole—and the increasing threat of the euro's ultimate collapse. Therefore, an alternative macroeconomic policy approach tackling the basic contradictions of finance-dominated capitalism and the deficiencies of European economic policy institutions and strategies—in particular, the lack of (1) an institution convincingly guaranteeing public debt and (2) a stable and sustainable financing mechanism for acceptable current account imbalances-is outlined.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_734.

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Date of creation: Oct 2012
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Handle: RePEc:lev:wrkpap:wp_734
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  1. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  2. Nathalie Girouard & Mike Kennedy & Christophe André, 2006. "Has the Rise in Debt Made Households More Vulnerable?," OECD Economics Department Working Papers 535, OECD Publishing.
  3. Thomas I. Palley, 2010. "Asset price bubbles and counter-cyclical monetary policy: Why central banks have been wrong and what should be done," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 7(1), pages 91-107.
  4. Hein, Eckhard & Mundt, Matthias, 2012. "Financialisation and the requirements and potentials for wage-led recovery : a review focussing on the G20," ILO Working Papers 470932, International Labour Organization.
  5. Jorge Uxó & Jesús Paúl & Eladio Febrero, 2011. "Current Account Imbalances in the Monetary Union and the Great Recession: Causes and Policies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(5), pages 571-592, December.
  6. Robert Wade, 2009. "From global imbalances to global reorganisations," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 539-562, July.
  7. Eckhard Hein & Achim Truger, 2006. "Germany's post-2000 stagnation in the European context - a lesson in macroeconomic mismanagement," IMK Working Paper 03-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  8. Sergio Cesaratto & Antonella Stirati, 2010. "Germany and the European and Global Crises," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 39(4), pages 56-86, January.
  9. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
  10. Petra Dünhaupt & Eckhard Hein & Till van Treeck, 2007. "Finanzsystem und wirtschaftliche Entwicklung: Tendenzen in den USA und in Deutschland aus makroökonomischer Perspektive," IMK Studies 05-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  11. Eckhard Hein & Engelbert Stockhammer, 2007. "Macroeconomic policy mix, employment and inflation in a Post-Keynesian alternative to the New Consensus Model," Department of Economics Working Papers wuwp110, Vienna University of Economics and Business, Department of Economics.
  12. Eckhard Hein & Achim Truger & Till van Treeck, 2011. "The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective," IMK Working Paper 9-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  13. Till van Treeck, 2008. "The political economy debate on ‘financialisation’ – a macroeconomic perspective," IMK Working Paper 01-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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