Abstract
The crisis of the euro area has questioned the fairness, sustainability and viability of the current setting of the European Monetary Union (EMU). In this article we use a four-country stock–flow consistent (SFC) model in the tradition of Godley/Lavoie (2007a) to examine to what extent an adaptation to Europe of Keynes's plan of a clearing union with bancor balances could help reduce the imbalances that, at least in part, drove the eurozone into crisis. Our simulation experiments suggest that the implementation of Keynes's ideas may conduct European countries to a stronger and more sustainable growth cycle.
Highlights
The crisis of the euro area has questioned the fairness, sustainability and viability of the current setting of the European Monetary Union (EMU)
Both the interest paid on the euro–bancor balances and their redistribution through intra-European adjustments (IEA), and the launch of more expansionary policies in the surplus countries, as well as the utilisation of IEA funds to finance supply-side policies improving the non-price competitiveness of southern European countries could be implemented with no major changes in the current setting of the Eurosystem
Regardless of the nature of the crisis in the eurozone, there is a possible way out that could provide the system with a higher level of stability and fairness
Summary
The crisis of the euro area has questioned the fairness, sustainability and viability of the current setting of the European Monetary Union (EMU). (Duwicquet et al 2013) There are those who point out that the pre-crisis deterioration in the current-account balances in southern European countries is a financial phenomenon produced by the excessive liquidity, the low level of real rates of interest in the South and the lack of regulation that characterised the years before the crisis (Constâncio 2014). These diagnoses reject the mainstream explanation of the crisis, which blames the allegedly profligate behaviour of southern countries.
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