Causes of the Eurozone Crisis and Heterodox Solutions


The Global Financial Crisis of 2008 began in the US. This crisis turned into a sovereign debt crisis in Europe. In this paper, I analyze the causes of the Eurozone crisis which is based on two unsustainable growth models that are export-led growth and debt-led growth, and the institutional design of the Economic and Monetary Union (EMU). Export-led growth of Northern Europe and the debt-led growth of Southern Europe were the main causes of the Eurozone crisis. After that, I introduce post-Keynesian economics for better theoretical background and explanations. By using wage-led growth models, I analyze the demand regime of the European Union. Lastly, I propose economic policies for the solution to the Eurozone Crisis. I argue that post-Keynesian economics is better at explaining the Eurozone crisis and offering alternative economic policies. As a result, the EU should consider governing the economy more actively and introducing redistributive economic policies.  

Keywords: Wage-led growth, post-Keynesian economics, Eurozone crisis.


The Global Financial Crisis began in the derivative markets of sub-prime mortgages in 2007. This crisis created the worst recession after the Great Depression in all advanced countries. Countries took precautions against the financial crisis and “prevented” an economic crisis. On the other hand, this crisis turned into a sovereign debt crisis in only Europe. In this paper, I argue that this crisis led to a sovereign debt crisis because of neoliberalism and the institutional design of the EMU. Two growth models of neoliberalism, which are debt-driven growth and export-driven growth, led to unsustainable economic growth and accumulation, and the EMU’s lack of effective response mechanisms to recessions and crises caused a sovereign debt crisis in Europe.  

Neoliberalism is an attempt to modernize liberal ideology. Its main desire is to maximize human well-being through a free market economy. It aims to do so through private property rights, free trade, free market, and individual liberty. It is different in one aspect from classical liberalism: classical liberalism claims that markets naturally exist and individuals exchange their goods and commodities in “naturally” existing markets. However, neoliberalism rejects this idea. According to David Harvey (2006), the state must create markets and preserve them for the sake of neoliberal ideas such as private property rights, free trade, and the free market. There are other explanations for neoliberalism. For example, Foucault (2022) argued that markets are not natural or self-regulating, they should be seen as desirable. If we use the Polanyian approach for our explanation, we can see that the making of the markets is the result of a violent process. As Karl Polanyi said (2001: p.258) “the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organisation on society for non-economic ends”. This understanding led to the abandonment of the Keynesian paradigm in economic policy. Abandoning the Keynesian paradigm resulted in the privatization of public goods, financialization, weakening of labour unions, and dissolution of the welfare state. However, neoliberalism did not yield desirable economic outcomes for Europe. It even caused the sovereign debt crisis after the Global Financial Crisis. 

1. Neoliberal Growth Models: Debt-Driven Growth of South and Export-led Growth of Germany

When I analyze the unsustainable growth of Europe, I use the Kaleckian concept of wage-led growth. It is important to determine whether the EU’s accumulation regime is wage-led or profit-led first. Kaleckian tradition argues that a higher wage share leads to expansionary effects (Stockhammer & Onaran, 2012). According to this concept, if an increase in wage share leads to expansionary effects on economic growth, this accumulation regime is described as wage-led. On the other hand, if an increase in wage share did result in contractionary effects on growth, this regime is described as profit-led (Lavoie & Stockhammer,2012). Whether an economy is wage-led or profit-led depends on the economic structure of a country or region. There are many determinants such as government policy, components of aggregate demand, foreign exchange value, and propensity to consume of classes (Lavoie & Stockhammer, 2012). The nature of the accumulation regime needs consistent distributional economic policies for sustainable economic growth. If a wage-led accumulation regime experiences pro-capital distribution, it will result in stagnation or external demand stimulation. On the other hand, if a profit-led economy experiences pro-labour distributional policies, the result will be stagnation or external demand stimulus. Neoliberalism, in theory, argues that a profit-led economy needs pro-capital distributional policies. Therefore, neoliberal politicians and economists were against redistribution and the welfare state because this inconsistency cannot generate economic growth. There are empirical studies (Onaran & Galanis, 2014) that survey the accumulation regime. Most countries have a wage-led accumulation regime. Although the EU as a closed economy has a wage-led economy, its distributional policies are pro-capital. This generated two unsustainable growth models which rely on financialization and globalization (Stockhammer, 2016). The first growth model is debt-driven growth. Debt-driven growth was used by the EU’s Southern European member states. This model is based on rising household debt and the flow of capital from abroad. For more aggregate demand, Southern European member states needed private debt. In the Keynesian Era, if there is a reduction in aggregate demand, governments can stimulate demand by using fiscal policy through government enterprises and public spending. However, it was impossible to do this because mass privatization has happened in the EU. Therefore, Crouch (2009) called this growth model “privatized Keynesianism”. At the same time, the European Commission endeavoured for a single European financial market through the Financial Services Action Plan, and the expansion of credits facilitated this process (Grahl, 2009). This finance-dominated economic regime was affected devastatingly by the Global Financial Crisis because the EMU had a lack of an effective responding mechanism (Bibow, 2007). However, I will discuss this in the next section. The second growth model is export-led growth. This growth model belongs mainly to Germany and it has one crucial characteristic. The main aim is to suppress wages in the domestic market in order to sell their own goods in other markets. From 2000 to 2008, Southern European member states experienced higher prices and wage inflations. They lost their competitiveness against Germany. This led to two unsustainable growth models. Southern European member states are dependent on German exports and Germany is able to export its goods because the South’s finance-dominated economy allows this (Stockhammer, 2011). Also, the EMU policies facilitated this. As a result, post-Keynesians see this as the outcome of neoliberal policies. On the other hand, Marxist political economists argue that this is an intended consequence. Germany aimed to be a hegemon and an export-dominant country (Stockhammer, Constantine & Reissl, 2016). 

The Global Financial Crisis began in 2008 and affected countries all over the world. The USA countered the recession by using quantitative easing. This unconventional monetary policy helped the US because the crisis did not turn into a depression. On the other hand, the European economic policy was not effective because the EMU’s institutional design did not permit countries to use counter-cyclical economic policies (Arestis & Sawyer, 2004). This resulted in a fragile recovery in the North because of their economic structure. On the other hand, the South was devastatingly affected because of its heavy reliance on capital flows and finance. In the next section, I will discuss why the EU did not effectively respond. 

2. Neoliberalism and Economic and Monetary Union

The Economic and Monetary Union is a set of economic policies that aim for higher economic integration. Participating countries agreed on some of the policies with the Maastricht Treaty. According to the EMU, there is one single monetary policy, common currency, and the coordination of fiscal policy is centralized. The EMU introduces many obstacles for national governments in terms of fiscal policy. Also, a strong and independent central bank -which is the European Central Bank (ECB)- did not provide a suitable monetary policy for each country. In this section, I will discuss the problems of the EMU and why the EMU could not prevent the worsening of the crisis. 

Firstly, fiscal policy should be determined and implemented by a nation according to economic needs. However, the EMU restricts countries from designing and implementing their fiscal policy. National governments must avoid budget deficits. Budget deficits cannot exceed 3 per cent of the GDP in the short term. Countries should also pursue a balanced budget in the medium-term (Verdun, Chp. 21 in Cini and Borragan). This prevents national governments from fighting against economic recessions and this rule does not serve the needs of macroeconomic functions. In addition to this, government debt should not exceed 60 per cent of the GDP (Stockhammer, 2016). Under these circumstances, governments cannot use expansionary stimulus packages (Arestis, McCauley & Sawyer, 2001). Secondly, monetary policy is centralized under the European Central Bank (ECB). There is one central bank that implements a single monetary policy. This also contributed to the worsening of the recession. Each economy needs different solutions and policies; has different economic structures, accumulation regimes, growth rates, and inflation rates. Therefore, the European Central Bank cannot achieve a monetary policy that could fit all countries. Moreover, there are other problems with the ECB and its institutional design. ECB has mandates to protect the euro (Stockhammer, 2014). The eurozone should be a low-inflation zone. In order to change this, a new treaty is needed. This makes changes difficult. Another problem is about checks and balances. Although the ECB gives instructions to the European Parliament (EP), the EP cannot give instructions to the ECB (Verdun, Chp. 21 in Cini and Borragan). The ECB only can pursue its determined policies. These characteristics of the EMU prevented EU members from minimizing the effects of the crisis. Lastly, the EMU relied on labour market flexibility. They argued that labour market flexibility can cure economic imbalances. This idea is based on neoliberal principles such as the efficiency of the free market. They mean downward wages by labour market flexibility. However, according to Keynes (1936), lower wages lead to a reduction in consumption. According to Keynesian theory, capitalists make their investments according to demand. Accordingly, workers who have lower wages cannot buy more goods because their propensity to consume decreases. As a result, a reduction in consumption leads to a reduction in investment. This process ends up in lower GDP and economic growth. Therefore, reliance on labour market flexibility did not generate desirable outcomes for the EU’s economy. 

3. Post-Keynesian Economics and the Eurozone Crisis  

I discussed and analyzed the economy of the EU. In the last section, I argue that post-Keynesian economics is superior in explaining the Eurozone crisis and offering solutions for a new accumulation regime in the EU. 

The first and most important principle of post-Keynesian economics is effective demand (Lavoie, 2015). According to this principle, capitalism is a monetary production economy and economic growth is demand-driven. If there is a decrease in aggregate demand, there will be a decrease in investment, production, and GDP. As we see in the EU’s case, the decrease in aggregate demand resulted in a decrease in GDP and investment. For this reason, according to post-Keynesian economics, governments should play an active role in the economy. Governments should manage government-led enterprises, and spend on public investment to ensure effective demand. If the EU pursues a post-Keynesian policy proposal, it can achieve sustainable economic growth. Secondly, according to post-Keynesian economics money is endogenously created and has a state origin (Lavoie, 2006). According to neoclassical economics, the supply of money is determined by central banks’ policies through interest rates and required reserve ratios. Neoliberal ideologist and economist Milton Friedman and his theory of Monetarism argued that the supply of money can be controlled through a central bank’s policy. As a result, inflation will no longer be a problem for economies. On the other hand, many empirical studies claim that money is created out of thin air and supply of money is determined by the markets, not central banks. Moreover, post-Keynesian economics analyzes the state origin of money. The government’s ability to collect taxes and government debt is the origin of the money (Stockhammer & Ali, 2018). Therefore, there is a reciprocal relationship between credit money and state money. For example, central banks are founded to finance state spending. In time, central banks became a lender of last resort for private banks. In most countries, central banks are governed by public-private partnerships. Therefore, monetary policy and fiscal policy cannot be separated because they are historically dependent. By separating fiscal and monetary policy, and giving the ECB extreme independence, the EU moves away from its aim of sustainable growth. If fiscal policy and monetary policy become interdependent, the EU can cure its economic imbalances. Thirdly, Post-Keynesians argue that the market cannot automatically reach the full employment level. I discussed wage-led growth above. Empirical studies found that the EU as a closed economy is wage-led. Therefore, for sustainable growth, the EU needs pro-labour distributional policies. The EU should not rely on labour market flexibility or wage suppression in order to reach full employment. Higher wages should be paid to European workers. Collective bargaining institutions and labour unions should be strengthened for higher wages with minimum wage laws. Fourthly, the financial system should be regulated. Debt-driven growth resulted in wealth and income inequality and generated unsustainable growth in the EU (Stockhammer, 2014). New economic policies should abolish asset-price bubbles, force the financial system to serve the interest of the public and not the interest of financial institutions, and provide people with higher incomes and not higher debts. In order to decrease wealth inequality and increase the income of the working class, wealth taxes should be implemented. This tax revenue can be used for redistribution. From rich regions to poor regions, this revenue can be distributed for their development and economic recovery. Lastly, governments should be allowed to have more autonomy in fiscal policy. Fiscal policy should be used to achieve full employment. Also, during recessions, fiscal policy should be used for counter-cyclical economic policies. Unemployment insurance, progressive taxation, and welfare programs are effective tools of fiscal policy according to post-Keynesians. 


The Economic and Monetary Union of the European Union is a set of policies that aim to achieve higher economic integration. The EMU is flawed in its aim because of the EU’s unsustainable growth models and the EMU’s institutional design. In this paper, I analyzed the Eurozone crisis from a different economic paradigm and perspective. As a result, I offer different economic policy proposals. The EU can achieve its economic and political integration aims if it changes its inadequate economic policies and alters the institutional design of the EMU, and therefore achieve sustainable economic growth. 

Ferhat Ege Aksaylı

European Studies Internship Program


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