ABSTRACT
This chapter summarises a post-Keynesian critique as to why the current ‘new monetarist’ model of EMU is underperforming. It covers such issues as technical weaknesses with the current approach, including problems caused by the lack of prior convergence and failure to meet the conditions established by the Optimum Currency Area theory. It outlines the problems derived from the flawed neo-liberal theoretical underpinnings which have inspired the design of the Eurozone institutional framework and its adopted set of policy objectives – this includes reliance upon assumptions of supply-side determined equilibrium levels of unemployment (i.e. NAIRU [non-accelerating inflation rate of unemployment], natural rate), excessive restrictions placed upon the use of fiscal policy as a stabilising force (through the Stability and Growth Pact [SGP] and subsequent fiscal compact) and a narrow focus upon the achievement of low inflation ahead of other economic objectives. It notes how the response to the financial crisis has exacerbated matters, confusing a problem with competitiveness and internal trade balance with fiscal profligacy, and thereby further restricting fiscal policy and causing both social and employment policy to be increasingly viewed as a means of reducing costs to restore competitiveness. In short, the chapter demonstrates the current model of EMU is fundamentally flawed.
