Conflicting claims in the eurozone? Austerity's myopia and the need for a European Federal Union in a post-Keynesian eurozone center–periphery model

Abstract

In this paper we study the role of the eurozone's institutional design in determining the sovereign debt crisis of the peripheral euro countries by means of a post-Keynesian eurozone center-periphery model. Within this framework, three points are formally addressed: (1) the incomplete nature of the eurozone with respect to a fully fledged federal union has significantly contributed to generating diverging trends and conflicting claims between central and peripheral eurozone countries in the aftermath of the 2007-2008 financial meltdown; (2) center-periphery diverging trends may disappear and a systemic crisis may occur should financial turbulences deepen in big peripheral economies, possibly spreading to the center; and (3) fiscal austerity does not address the core problems of the eurozone. The creation of a European federal government, capable of implementing anti-cyclical fiscal policies through a federal budget, and of a government banker constitutes the most promising solution to stabilize the macroeconomic picture of peripheral countries and to tackle the crisis. The unlimited bond-buying program recently launched by the ECB is a positive albeit mild step in the right direction away from the extreme monetarism that has shaped eurozone institutions thus far. Keywords: eurozone debt crisis, post-Keynesian center-periphery model JEL codes: E02, H63 INTRODUCTIONSince 2010, economists have devoted increasing efforts to explaining the causes of the eurozone crisis, and to possibly finding a way out. Various opinions have emerged. Among them, some economists indicate the 'original sins in the European Monetary Union (EMU) institutional setup' (Papadimitriou and Wray 2012) as decisive factors which have deepened the current crisis. In 1999, eurozone countries lost monetary * Email: abotta@eco.unipv.it. I am indebted to Antoine Godin, Clara Capelli, Alberto Russo, Alessia Lo Turco, and two anonymous referees whose comments have significantly improved previous versions of this paper. Of course, I am responsible for any remaining errors. sovereignty by adopting the same currency and issuing debt in a currency that they do not control. Furthermore, in the EMU there is no federal institution to support member states in the event of severe economic downturns. Indeed, the EMU works 'much like a US with a FED, but with only individual state treasuries. It would be as if each EMU member country were to attempt to operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency according to the dictates of private markets ' (Wray 1998, pp. 91-92). All these missing elements in the original design of the EMU seriously expose member states to default risk (Papadimitriou and Wray 2012), hence financial turbulences, which would hardly take place in economies that are monetarily sovereign (De Grauwe 2011). The most reasonable way to solve the crisis is the reconciliation of fiscal and monetary policies through a European federal government with monetary sovereignty and a European Cent...

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