Fiscal policy, Eurobonds, and economic recovery: heterodox policy recipes against financial instability and sovereign debt crisis

Alberto Botta

Journal of Post Keynesian Economics, 2013, vol. 35, issue 3, 417-442

Abstract: This paper proposes a simple post-Keynesian model on the linkages between the financial and real side of an economy. It shows how financial variables may interact with each other and affect economic activity, possibly giving rise to intrinsically unstable economic processes. These destabilizing mechanisms explain why governments' intervention in the aftermath of the 2007 financial meltdown has been largely useless to restore financial tranquility, and has transformed a private debt crisis into a sovereign debt one. The paper concludes by looking at the long run and the interaction between long-term growth potential and public debt sustainability. The European economic context and the macroeconomic difficulties currently faced by several European Union (EU) members are discussed. The paper emphasizes that: (1) financial turbulence may trigger permanent reductions in long-term growth potential and unsustainable public debt dynamics; and (2) strong institutional discontinuity such as EU financial assistance to member countries is probably the only way to restore growth and ensure long-run public debt sustainability.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:mes:postke:v:35:y:2013:i:3:p:417-442

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DOI: 10.2753/PKE0160-3477350305

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