Keynes, the 'Krach' of 1929 and the Current Euro Debt Crisis

Abstract

There are striking similarities between the 'Krach' of 1929 and the current euro area debt crisis concerning the adjustment mechanisms involved overcoming international trade imbalances caused then by the German Transfer Problem and war reparations in general and now by intra-euro-area trade imbalances. Current account deficits entail necessarily public and/or private indebtedness unless there are offsetting capital flows. In both cases the adjustment over the exchange rate is not possible then due to the Gold Standard and the Dawes Plan arrangements and now with the euro as the common currency. Therefore, it is argued that the economic consolidation efforts within the euro area must be coordinated by feasible mutually accepted balance of payments structures for all Member States which guarantee a harmonious growth oriented recovery process for the euro area. The structural reforms of the capital markets are of much greater importance than the reforms of product and labour markets. Intra-euro-area capital flows as direct investments or other lending have to be organized so that balance of payments equilibria are reached avoiding new public debt. A new economic policy instrument is proposed, the investment wage, offering a collective and democratic generation and control over these capital flows. Thereby the recovery programs are geared towards opening up the way to economic democracy.