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New EU (-1) Treaty Kills Keynesianism

December 12th, 2011 · No Comments

Probably not much of a problem, under normal circumstances. However, in times of a financial crisis…


The new EU treaty (minus Britain) has abolished much room for fiscal policy.

Under normal, business cycle generated variety in economic activity, monetary policy is probably enough to stabilize output and smooth out the business cycle (one can do this either by rule or discretionary policy).

This becomes more problematic under a currency union when there is ‘one-size-fits-all’ monetary policy. If parts of the union are booming, but other parts are in recession, what is the central bank going to do?

However, abolishing a fiscal policy can become really problematic when there is a financial crisis and monetary policy loses much of its traction, as experiences in Japan have shown. From ShareholdersUnite at Seeking Alpha:

The Death Of Keynesianism – Seeking Alpha

Tags: Economics