Achim Truger

European Monetary Union: nominal convergence, real divergence and slow growth?

Abstract It is now widely acknowledged that the structural characteristics of the countries to form the European Monetary Union (EMU) did not meet the conditions of an optimum currency area (OCA) when the euro was introduced in 1999. The OCA criteria appear to have little relevance for monetary integration, because they fail to capture the importance of macroeconomic policy institutions for growth and convergence across a currency union. This paper examines the effects of the EMU framework for monetary, fiscal and wage policies on overall growth and on convergence across the euro area. It is concluded that the years before and after the introduction of the euro were characterized by a restrictive policy mix that has not been conducive to aggregate growth nor to real convergence.

What ever happened to Germany? Is the decline of the former european key currency country caused by structural sclerosis or by macroeconomic mismanagement?

This paper challenges the institutional sclerosis view of the German crisis according to which rigid labour markets and generous welfare state institutions have driven Germany into its position as ‘Europes sick man’. In general, the view is not convincing, because the underlying hypotheses about the effects of labour market regulation and welfare state institutions on employment and growth cannot unambiguously be derived from modern labour market theory and are at least partially at odds with accepted empirical findings. In particular, the explanation is unconvincing, because in international comparison Germanys labour market and welfare state institutions are simply not as sclerotic as often supposed. In most of the aggregate indicators for structural rigidities Germany is not worse than the average OECD or EU country. Moreover, there is a macroeconomic explanation focusing on the combined effects of restrictive and pro‐cyclical monetary, fiscal and wage policies in Germany that is broadly consistent with modern macroeconomic theory and is supported by empirical data.

Finance-dominated capitalism in crisis - the case for a Global Keynesian New Deal *

We analyze the long-run imbalances of finance-dominated capitalism underlying the present crisis, which began in 2007, with a focus on developments in the United States and Germany. We argue that beyond inefficient regulation of the financial sector, the severeness of the present crisis has been mainly caused by increasing inequalities of income distribution and rising imbalances in the world economy associated with finance-dominated capitalism. From this it follows that in the near and not so near future, the United States will no longer be able to act as the driving force for world demand. In order to avoid a period of deflationary stagnation in major parts of the world economy, we finally propose the policy package of a global Keynesian New Deal that should consist of (1) reregulation of the financial sector, (2) reorientation of macroeconomic policies along (post) Keynesian lines, and (3) reconstruction of international macroeconomic policy coordination, in particular on the European level, and a new world financial order.

Germany’s Post-2000 Stagnation in the European Context — a Lesson in Macroeconomic Mismanagement

In the present paper we question the mainstream diagnosis of Germany’s post-2000 stagnation as well as the prescribed remedies. We show that the ‘institutional sclerosis’ view of Germany’s stagnation is unfounded and that therefore the political measures proposed and actually taken are misguided. Instead, we claim that macroeconomic mismanagement explains the German absolute and relative stagnation compared with the Euro area as a whole and with the USA. If the problem of macroeconomic mismanagement is not addressed and solved, irrespective of occasional cyclical upswings, we predict a continuing stagnation tendency for the German economy. And we argue that this is not only a German problem, but a matter of European concern, because the macroeconomic policies which have caused the German constellation will have major negative feedback effects on the other Euro area countries in the near future.

The European Financial and Economic Crisis: Alternative Solutions from a (Post-)Keynesian Perspective

The financial and economic crisis in the Euro area has revealed a number of important flaws in the economic policy framework in Europe. On the one hand, the imbalances, which have dominated European development since the introduction of the euro, are not sustainable; and this is more serious in a period of crisis in particular. On the other hand, it has become clear that the Euro area suffers from a serious lack of institutions and policy concepts, which will not allow coping with deep financial and economic crises unless a deep restructuring takes place. The policy reactions of European governments, the European Commission and the European Central Bank in cooperation with the IMF will, therefore, hardly be able to initiate recovery. On the one hand, some important steps towards financial stabilisation have been made. On the other hand, however, these are combined with restrictive fiscal and wage policies, which will impose deflationary pressure on major parts of the Euro area and thus prevent stabilisation (or reduction) of public debt-GDP ratios. In the paper we will first analyse the imbalances, which have been built up in the Euro area, before we briefly review the policy responses towards the crisis. Since the prescribed fiscal and wage policies are still dominated by the New Consensus Macroeconomics theoretical framework, we will then develop an alternative macroeconomic policy model based on Keynesian and Post-Keynesian principles. It will be shown that stabilising wage and active fiscal policies will have major roles to play in order to cope with the imbalances and to initiate recovery for the EU as a whole. Furthermore, current account targets will have to be included into intra-Euro area policy coordination.

Fiscal Policy and Macroeconomic Performance in the Euro area - Lessons for the Future

Since the start of the European Monetary Union fiscal policy in the Euro area has been dominated by the Stability and Growth Pact (SGP). Quite obviously the SGP has been unsuccessful in fulfilling its goals, fiscal sustainability and supporting economic growth. More and more countries have exceeded the 3 percent of GDP limit for the budget deficit, while at the same time macroeconomic performance has been unsatisfactory. We analyse fiscal policy and its macroeconomic impact for the Euro area as a whole and for selected countries and compare it with US fiscal policy, with a special emphasis on the period 2001-2005. Whereas US fiscal policy has been strongly counter-cyclical, thus stabilising the economy, in the Euro area fiscal policy has been much more restrictive and has had pro-cyclical and therefore destabilising effects for many countries. However, one cannot put all the blame on fiscal policy. The ECBs restrictive monetary policy and divergent and destabilising wage developments across the Euro area are at least as important as fiscal policy in the explanation of the Euro areas weak economic performance. As a possible solution for the future, we suggest to replace the SGP by expenditure paths as coordination tool, and we discuss an important modification of the concept. Such expenditure paths could co-ordinate fiscal policies across the Euro area in a counter-cyclical way and at the same time ensure fiscal sustainability. Unfortunately, as long as monetary and wage policies remain un-coordinated and destabilising, any improvements in fiscal policy will not be very effective in enhancing economic performance.

Finance-dominated Capitalism in Crisis — The Case for a Keynesian New Deal at the European and the Global Level

We analyse the long-run imbalances of finance-dominated capitalism underlying the present crisis, which began in 2007, with a focus on developments in the USA, on the one hand, and in Germany and the Euro area, on the other hand. We argue that beyond inefficient regulation of the financial sector, the severity of the present crisis has been caused principally by increasing inequalities of income distribution and rising imbalances in the world economy as well as in the European economy associated with finance-dominated capitalism. From this it follows that in the near and not so near future, the USA will no longer be able to act as the driving force for world demand. In order to avoid a period of deflationary stagnation in major parts of the world economy and a disintegration of the Euro area, we finally propose the policy package of a Keynesian New Deal at the global and at the European level which should consist of: (i) the re-regulation of the financial sector; (ii) the re-orientation of macro-economic policies along (Post-)Keynesian lines; and (iii) the re-construction of international macroeconomic policy coordination, in particular in the Euro area, and a new world financial order.

How to Fight (or Not to Fight) a Slowdown

The current global recession, along with the credit crisis, requires that the prevailing economic model be seriously debated and, these economists contend, reformed. The authors criticize the mainstream New Consensus approach in macroeconomics for its reliance on stabilization by means of monetary policies, its ill-designed approach to the role of wages and wage policies, and its complete neglect of fiscal policies. Instead, they argue that for macroeconomic stabilization the whole macroeconomic policy mix of monetary, fiscal, and wage policies, as well as open economy conditions, has to be considered. Based on this view, they analyze macroeconomic performance and macroeconomic policies in France, Germany, Sweden, and the UK between 1996 and 2005. They show that the widely differing success with respect to the degree of recovery after the 2000-2001 slowdown can be explained very plausibly by differences in the macroeconomic policy mix. However, there are important drawbacks in each case.

Monetary policy, macroeconomic policy mix and economic performance in the Euro area

In order to explain slow growth and high unemployment in the Euro area, in particular if compared to the USA, we follow a macroeconomic policy view focussing on the more restrictive stance of monetary, fiscal and wage policies in the Euro area. In the present paper we focus on the particular role of monetary policy, because the European Central Bank (ECB) seems to be the major obstacle to higher growth and employment. Analysing the macroeconomic policy mix, wage policies and fiscal policies are taken into account at the outset, but then the determinants of ECB policies are assessed in more detail. Our analysis confirms that it is the ECBs overemphasising a too low inflation target which is a major problem for macroeconomic performance in the Euro area. The ECB is too exclusively occupied with inflation and wage developments and pays too little attention to the development of real variables. In order to improve growth and employment and to limit the risks of deflation in the largest economy of the Euro area, Germany, it is therefore required that the ECB raises its inflation target and that the central bank focuses more on real economic activity.

Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective

The German debt brake is often regarded as a great success story, and has therefore served as a role model for the Euro area and its fiscal compact. In this paper we fundamentally criticize the debt brake. We show that (1) it suffers from serious shortcomings, and its success is far from certain even from a mainstream point of view; (2) from a Post-Keynesian perspective, it completely neglects the requirements for fiscal policies of member-countries in a currency union and will prevent fiscal policy from contributing to the necessary rebalancing in the Euro area; and (3) alternative scenarios, which could avoid the deflationary pressures of the German debt brake on domestic demand and contribute to internally rebalancing the Euro area, are extremely unlikely, as they would have to rely on unrealistic shifts in the functional income distribution and/or investment and savings behavior in Germany. The German debt brake is often regarded as a great success story, and has therefore served as a role model for the Euro area and its fiscal compact. In this paper we fundamentally criticize the debt brake. We show that (1) it suffers from serious shortcomings, and its success is far from certain even from a mainstream point of view; (2) from a Post-Keynesian perspective, it completely neglects the requirements for fiscal policies of member-countries in a currency union and will prevent fiscal policy from contributing to the necessary rebalancing in the Euro area; and (3) alternative scenarios, which could avoid the deflationary pressures of the German debt brake on domestic demand and contribute to internally rebalancing the Euro area, are extremely unlikely, as they would have to rely on unrealistic shifts in the functional income distribution and/or investment and savings behavior in Germany.