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The euro zone crisis: What would John Maynard do?

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  • Ehnts, Dirk

Abstract

In his letter to US President Franklin D. Roosevelt Keynes (1933) wrote about "the technique of recovery itself". An increase in output is brought about by an increase in purchasing power, Keynes argues, which can come from three sectors: households, firms and government. Using the IS/MY macroeconomic model developed by Ehnts (2014), which features sectoral balances and endogenous money, the situation of some euro zone members is examined with a focus on the three techniques of recovery: increases in debt of the respective sectors as defined by Keynes. A fourth technique, an increase in spending by the rest of the world, is added. The conclusion is that the policy recommendation given by Keynes in his letter also holds for the euro zone at present: a rise in debt-financed government expenditure. Some reform at the institutional level in Europe would enable "the technique of recovery" to work via the TARGET2 payment system, which is organized along Keynes' International Clearing Union proposal and a solid foundation to build on.

Suggested Citation

  • Ehnts, Dirk, 2016. "The euro zone crisis: What would John Maynard do?," IPE Working Papers 72/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    • Handle: RePEc:zbw:ipewps:722016
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    References listed on IDEAS

    as
    1. Lino Sau, 2008. "Two Founding Fathers of the Post Keynesian Critical Appraisal of Self-balancing Mechanisms?," Chapters, in: L. Randall Wray & Matthew Forstater (ed.), Keynes and Macroeconomics After 70 Years, chapter 4, Edward Elgar Publishing.
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    4. Richard P. F. Holt, 2006. "Contemporary Post Keynesian Analysis," Journal of Economic Issues, Taylor & Francis Journals, vol. 40(1), pages 233-235, March.
    5. Mathew Forstater & L. Randall Wray (ed.), 2008. "Keynes for the Twenty-First Century," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-61113-9.
    6. Eckhard Hein & Daniel Detzer, 2015. "Post-Keynesian Alternative Policies to Curb Macroeconomic Imbalances in the Euro Area," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(2), pages 217-236, June.
    7. Wynne Godley & Marc Lavoie, 2012. "A Simple Model of Three Economies with Two Currencies: The Eurozone and the USA," Palgrave Macmillan Books, in: Marc Lavoie & Gennaro Zezza (ed.), The Stock-Flow Consistent Approach, chapter 7, pages 159-188, Palgrave Macmillan.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Dirk Ehnts — The euro zone crisis: What would John Maynard do?
      by contrarianmedia@hotmail.com (Mike Norman) in Mike Norman Economics on 2016-09-14 19:53:00
    2. The euro zone crisis: What would John Maynard do? (working paper)
      by Dirk in econoblog101 on 2016-09-14 12:41:16

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    More about this item

    Keywords

    deficit spending; fiscal policy; sectoral balances; Keynes; Keynesian economics;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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