NAIRU economics and the Eurozone crisis

Abstract

Intra-Eurozone current-account imbalances (and divergent external debt positions) cannot be attributed to the deterioration of cost (or price) competitiveness in Europe’s periphery vis-à-vis its core. Imbalances were driven by high domestic demand growth in the periphery, which was financed by capital flows from the core. The external finance – following capitalist logic – ended up in non-traded medium-low-tech activities (e.g. construction). This points to a structural problem in pan-European financial integration – which we locate in the economic ideology guiding the EMU: NAIRU economics. We zoom in on the reasons why NAIRU-based monetary policy deepened the already existing structural heterogeneity in the Eurozone, locking the Southern-European economies up in low- and medium-technology activities often in direct competition with China. The only way out is a rethink of Eurozone macroeconomic and industrial policies which – going beyond often-made calls for broad-based fiscal stimulus or a clearing arrangement – fundamentally reconsiders the role of the ECB in light of what needs to be done to create Europe’s non-price comparative advantage of tomorrow.