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Wednesday, October 26, 2016
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European Economic Policies

Alternatives to Orthodox Analysis and Policy Concepts

"Series of studies of the Research Network Macroeconomics and Macroeconomic Policies (FMM)" · volume 9

349 pages · 29.80 EUR (incl. VAT and Free shipping)
ISBN 3-89518-560-4 (August 2006)



Since the final stage of European monetary integration in the mid-1990s, the member countries of the Euro area have been suffering from slow growth and high unemployment. On average, the Euro area's economic performance has been unsatisfactory, in particular since the growth slow down in 2001. The only undisputed achievement of European monetary integration so far has been a remarkable reduction in the inflation rate. However, this reduction comes at the cost of a still present risk of deflation in some of the member countries of the European Monetary Union (EMU), particularly in Germany.

What is most striking is the response of economic policy actors in Europe and mainstream economic policy advisers to the challenges posed by the current economic problems: They call for further structural reforms in the labour market and in the social benefit system. However, this would mean following a strategy which has been pursued for over 25 years in order to increase potential growth and to reduce structural unemployment. Monetary and fiscal policies have been downgraded in order to supply a stable environment - which means stable prices and low inflation expectations. In Germany the situation seems to be even more severe than in the rest of Europe. Mainstream economic policy advisers predominantly even deny short run real effects of macroeconomic policies. The present volume covers papers which are critical towards orthodox analysis and mainstream European economic policy concepts. They explore alternative approaches to achieve higher growth and lower unemployment. The first section assesses the reasons for slow growth and high unemployment in Europe. The second section concentrates on the problems associated with the enlargement of the European Union. Last but not least, the papers in the third section discuss alternative economic policy concepts.


  • Eckhard Hein, Arne Heise and Achim Truger

I. European Macroeconomic Policy Analysis

  • Markus Marterbauer and Ewald Walterskirchen
    Neglecting demand and cycle in the Euro area
  • Catherine Mathieu and Henri Sterdyniak
    A European fiscal framework designed for stability or growth?
  • Hubert Hieke
    Germany's financial balances and the Stability and Growth Pact - Some potentially damaging aspects of the deficit criterion
  • Louis-Philippe Rochon and Sergio Rossi
    The monetary policy strategy of the European Central Bank. Does inflation targeting lead to a successful stabilisation policy?
  • Camille Logeay, Katja Rietzler, Sabine Stephan and Rudolf Zwiener
    Understanding wage, price and export performance in the Euro area. Evidence form a multi-country-macro-econometric model
  • Jesus Ferreiro and Carmen Gomez
    New incomes policy in Spain

II. EU-Enlargement

  • Jan Priewe
    Exploring the future borders of the European Union
  • Jens Hölscher and Johannes Stephan
    Money and credit market integration in an enlarging Euro zone: Methodological issues
  • Wolfgang Blaas and Karoly Lóránt
    Current account as a structural weakness of the new EU members
  • Özlem Onaran
    Speculation-led growth and fragility in Turkey: Does EU make a difference or 'can it happen again'?

III. Alternative Policy Concepts

  • Pascal Petit
    Growth in Europe: Putting diversity to work
  • Jörg Huffschmid
    Economic policy for the European Social Model
  • Arne Heise
    European economic governance: Policy-making beyond the nation-state?
  • Riccardo Bellofiore and Joseph Halevi
    Is the European Union Keynesian-able? A sceptical view

known reviews by the publisher (abridgements)

Intervention, 2008, Heft 1 ()  [ to top ]

"European Economic Policies covers papers which are critical towards orthodox economic analysis and mainstream European economic policy concepts, and explore alternative approaches to achieve higher growth and lower unemployment. The book is divided into three sections. The first part contains contributions which asses the reasons for slow economic growth and high unemployment in Europe. The second part deals with problems associated with the enlargement of the EU. In the last part, alternative economic policy concepts are discussed.

Markus Marterbauer and Ewald Walterskirchen argue that the stagnation of the Euro area since 2000 relative to the world economy is closely connected to the dominance of purely long-run supply-side oriented policies. The EU policy guidelines completely neglect anti-cyclical and demand-oriented policies. In the short run, monetary and fiscal policies are not expansionary and structural reforms are deterring consumers' expectations. In the medium run, growth differentials can be explained largely by rising house prices and anticyclical policies in Anglo-Saxon and Scandinavian countries rather than structural reforms. In the long run, higher expenditure on research and development and education will lead to higher economic growth only if capacity utilisation is sufficient to induce additional investment.

The chapter by Catherine Mathieu and Henri Sterdyniak deals with the Stability and Growth Pact (SGP). They criticise the rigidity of the fiscal rules and the lack of economic rationale for its design. In their opinion, the theoretical and empirical basis behind this framework is rather weak and strictly anti-Keynesian. Although the reforms in 2005 make steps towards more economic rationale, important issues remain unsolved. The authors postulate the right of member states for an autonomous national fiscal policy. On the other hand, binding rules should be established for inflation and current account balances. Hubert Hieke complements this analysis of the SGP and argues that Germany recently experiences a financial surplus of the private sector, which is balanced by a current account surplus. In order to eliminate budget problems and get in line with the SGP, either the private financial surplus must be reversed or the current account surplus has to increase further. According to Hieke, the most probable scenario is that wages would be lowered further relative to trading partners in order to become more competitive, which would result in a deflationary bias in Germany.

Louis-Philippe Rochon and Sergio Rossi in turn focus on the monetary policy of the ECB. They argue that monetary policy has not been oriented to output and employment but merely concentrated on price stability, however, without being able to meet that target. The paper analyses the ECB's monetary stance and addresses the question if the observed decrease in inflation rates in the Euro area is attributable to monetary policy. It finds that monetary policy via higher interest rates leads to lower wage shares and thereby collapses aggregate demand. The authors conclude that monetary policy is not an effective tool to fight inflation.

The inflation target for monetary policy thus needs to be questioned. The chapter by Camille Logeay, Katja Rietzler, Sabine Stephan and Rudolf Zwiener deals with wage, price and export dynamics in the Euro area. Due to the fixed nominal exchange rates in the monetary union, wages and prices have to carry the load of adjustment to external and internal shocks and thus to changes in international competitiveness. As these adjustment processes are typically slow and costly, the authors recommend a normative wage formula where nominal wages in each country rise to the same extent as average productivity in the respective country plus the target inflation rate of the ECB. Countries would then not create competitive advantages for themselves at the expense of other member countries through wage dumping. Instead, all countries would contribute to European growth and to meeting the ECB's inflation target at the same time. Jesus Ferreiro and Carmen Gomez conclude the first section of the book and focus on the Spanish experience with wage moderation in the 1980s and 1990s. They analyse the economic, social and political framework in which the wage policies were implemented, as well as the economic results.

The second section of the book starts with a chapter by Jan Priewe about the future enlargement of the EU. He argues that further extensions of the EU would make it more heterogeneous in terms of the real economy. Because the architecture of the EU was designed for a homogenous union, these extensions could be problematic. The author therefore points out the need for the EU to become more homogenous and for a deepening of the political union. For potential member countries with lower incomes a special status as ›associated member‹ or a special exchange rate regime of their own currencies with respect to the Euro may be alternatives to full accession. Jens Hölscher and Johannes Stephan discuss methodological issues in the context of an enlarging Euro area. They find that the new member countries look under-banked, whereas interest rates are converging. They propose the adoption of the Euro by the new EU members rather sooner than later. Wolfgang Blaas and Karoly Lóránt analyse current account problems of the new EU members. Given insufficient international competitiveness, the current accounts tend to deteriorate. The authors discuss some typical processes of transformation and transition in the new member countries, which are responsible for these imbalances by means of a case study about Hungary. External imbalances restrict growth to a level which is too low to compensate for the high productivity gains.

Thus, unemployment rises in spite of high economic growth. The chapter by Özlem Onaran shows that in terms of overvaluation of the local currency and the current account deficit, Turkey as well as some other Central and East European countries are highly vulnerable compared with the corresponding values of East Asia, Turkey and Latin America before the outbreak of the crisis. In the case of Turkey, this is the outcome of the structural problems of the economy based on speculation-led growth. Speculation and thus fragile growth patterns are an intrinsic outcome of market economies. She argues that current economic policy of the EU will make it even harder to implement policies that would limit the mobility and speculative activities of capital. Thus, democratic but regulatory interventions going along with the EU enlargement are needed to make the economy meet the needs of the people.

Pascal Petit opens up the last part of the book with a paper about institutional diversity in the EU. He argues that taking advantage of the diversity between the EU member states will lead to fruitful institutional changes, leading to more growth and welfare. The contingencies and path dependencies of national institutions thus should be taken into account. Jörg Huffschmid proposes a European Social Model (ESM) consisting of five cornerstone elements: Full employment, social welfare and security, equity, ecologically sustainability and balanced and cooperative international economic relations. He argues that mainstream economic policy poses obstacles to the ESM, such as the dominance of competition, strong restrictions for macroeconomic policy, social policy minimalism and a vicious circle consisting of low growth, high unemployment and rising inequalities which reinforce themselves.

To overcome these obstacles, the EU economic policy needs changes: A political framework of rules into which markets and competition must be re-embedded and macroeconomic policy, i. e. monetary and fiscal policy need to become oriented to growth and employment. He also discusses the main problems encumbering these measures and their solutions as well as the political practicability within the EU. Arne Heise addresses the issue that globalisation - the growing cross-border movements of goods, services and production factors - seems to contradict the constitutional principles of nation-states which are territorially defined. Public goods such as infrastructure, price stability, social security and economic stability are usually provided by the state. He discusses the problems and possible solutions of the provision of public goods at the EU level and assesses the European Economic governance system. Ricardo Bellofiore and Joseph Halevi conclude the book with an evaluation of the possibilities to apply Keynesian policies to the EU. They argue that the economic policy in Europe switches between neoliberal and social-liberal, both believing strongly in the positive effects of globalization and the need for ›sound‹ finance. Under these conditions, no redistribution of incomes can happen. An alternative policy therefore would need to challenge the existing system of capitalist relations by means of structural policies. Both books provide a very good overview of current research activities about European integration and macroeconomic policies in the EU based on theory in the line of Keynes and Post-Keynesian economics. As they are collections of various papers, they address a broad range of issues, i. e. monetary, fiscal and wage policies as well as problems of currency unions, integration of nation states and the co-ordination of macroeconomic policies.

Each paper highlights a specific point of analysis; consequently, the contributions are both complementary and controversial, thus providing a diff erentiated picture of the respective topics. Although the reader may find that sometimes the papers are not very interconnected or repeat each other, everybody who is interested in macroeconomic policy and European integration should find a lot of inspiring aspects for discussion and further research in this book."

the authors
Prof. Dr. Achim Truger
Achim Truger Professor at the Berlin School of Economics and Law, Department of Business and Economics. former Senior Researcher at the Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation, Duesseldorf, Germany. [more titles]
Prof. Dr. Eckhard Hein
Eckhard Hein Professor of Economics, in particular European Economic Policies, at the Berlin School of Economics and Law, Germany. [more titles]
Prof. Dr. Arne Heise
Arne Heise ist Universitätsprofessor für Finanzwissenschaft und Vizepräsident für Forschung und wissenschaftlicher Nachwuchs der Hamburger Universität für Wirtschaft und Politik. [more titles]
known reviews by the publisher
  • Intervention, 2008, Heft 1 more...
  • ZPol 4/2007, S. 1409
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