Conflicting Claims in the Eurozone? Austerity’s Myopic Logic and the Need for a European Federal Union in a post-Keynesian Eurozone Center-Periphery Model (New Version)

Alberto Botta

No 44, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: In this paper we study the role of the eurozone’s institutional design in determining the sovereign debt crisis of the peripheral euro countries by means of a post-Keynesian eurozone center-periphery model. Within this framework, three points are formally addressed. (1) The incomplete nature of the eurozone with respect to a full-fledged federal union has significantly contributed to generating diverging trends and conflicting claims between central and peripheral eurozone countries in the aftermath of the 2007- 2008 financial meltdown. (2) Center-periphery diverging trends may disappear and a systemic crisis may occur should financial turbulences deepen in big peripheral economies, possibly spreading to the center. (3) Fiscal austerity does not address the core problems of the eurozone. The creation of a European federal government, capable of implementing anti-cyclical fiscal policies through a federal budget, and of a government banker constitutes the most promising solution to stabilize the macroeconomic picture of peripheral countries and to tackle the crisis. The unlimited bond-buying program recently launched by the ECB is a positive albeit mild step in the right direction away from the extreme monetarism that shaped eurozone institutions thus far.

Keywords: eurozone debt crisis; post-Keynesian center-periphery model (search for similar items in EconPapers)
JEL-codes: E02 H63 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-05
New Economics Papers: this item is included in nep-mac and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:demwp0044

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