How to Solve the European Economic Crisis: Challenging Orthodoxy and Creating New Policy Paradigms

Overview

This book challenges the macroeconomic policy orthodoxies currently being applied in most European countries. The book identifies the misplaced policy orthodoxies and then sets out 23 policy principles (including new economic policy paradigms) that should guide economic policy-making in Europe going forward. The new overarching policy objective should be to provide stimulus and economic growth without raising public debt.

The book argues that current fiscal austerity policies ...

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Overview

This book challenges the macroeconomic policy orthodoxies currently being applied in most European countries. The book identifies the misplaced policy orthodoxies and then sets out 23 policy principles (including new economic policy paradigms) that should guide economic policy-making in Europe going forward. The new overarching policy objective should be to provide stimulus and economic growth without raising public debt.

The book argues that current fiscal austerity policies are taking the periphery economies and the United Kingdom in the wrong direction. The book establishes the case for a reversal of policy aimed at providing economic stimulus and growth. Austerity forces real wages to fall in an uncoordinated manner, lowers demand and tax revenue, raises unemployment and adds to budget deficits and the level of public debt.

The book explains why the financing on-going budget deficits by the issuance of new government bonds adds to public debt and could result in higher interest rates.

It is also demonstrated that creating new money to purchase government bonds on the secondary market is a second or third best policy.

The book recommends that, instead, new money creation should be used to finance on-going fiscal deficits. By this method economic stimulus can be delivered without raising public debt further.

To resolve the external competitiveness problem that afflicts the periphery countries the book recommends a prices and incomes policy. This policy would replace austerity to achieve the right balance between wages and prices, and the required deflation in prices. Under this approach there is no need to increase unemployment.

The book explains how the new approach to monetary and fiscal policy coordination could be implemented. Potential options include the central bank or the Ministry of Finance creating new money to finance the fiscal deficit. As well, the book explains how this policy can be implemented in a way that does not increase inflation.

The book proceeds in the following way. There are 4 chapters which provide illustrations of how the author has challenged orthodoxies and provided new policy paradigms. These chapters cover the global economic crisis (Chapter 2); the stagflation/real wage problem that occurred in Australia between 1974 and 1982 (Chapter 3); the crisis in respect of the taxation of hybrid financial instruments (Chapter 4); and, the chronic balance of payments crisis present in most Pacific island microstates (Chapter 5).

Chapter 2 explains why further quantitative easing will do little to resolve the problem of inadequate aggregate demand. The problems created by continued quantitative easing are identified. Chaoter 2 also explains the history and benefits of the proposed policy of creating new money not to benefit the banks and bond traders (as with QE), but to benefit the real economy: the unemployed, small business and infrastructure projects, where marginal propensities to consume are relatively high.

Chapter 3 illustrates how stagflation and high real wage cost problems were resolved in Australia during the 1980s. The solution involved the application of a prices and incomes policy to lower real wages while simultaneously lowering nominal wages and prices. This application of a prices and incomes policy in Australia provides insights as to how a prices and incomes policy could be applied in European periphery countries today, not to lower real wages but to lower prices and improve international competitiveness.

Chapter 5 develops a new measure called 'the distance form external balance'. This measure demonstrates that it is the microstates among Pacific island countries are furthest from external balance. The chapter reviews policy options and argues that current 'dollarisation' policies are inappropriate and should be changed. The general policy principles applying in the Pacific currency unions are applicable to the periphery countries in the Eurozone.

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Product Details

  • ISBN-13: 9781481023214
  • Publisher: CreateSpace Independent Publishing Platform
  • Publication date: 12/11/2012
  • Pages: 114
  • Product dimensions: 8.00 (w) x 10.00 (h) x 0.24 (d)

Meet the Author

The author is an Australian macroeconomist. He has published widely on wages policy, taxation of financial instruments, investment and finance and Pacific island macroeconomic issues.

In 1974 the author proposed a wages and priced policy to address high inflation and high unemployment simultaneously. The orthodoxy at the time was that market forces (high unemployment) would solve these problems. market forces did not resolve the underlying problem and real wage costs and inflation surged again in 1982. The author's policy prescription was then accepted by government, and inflation and unemployement subsequently fell back as real unit wage costs were reduced.

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