On macroeconomic policy, effective demand and unemployment : the European experience

Alexiou, Constantinos. (2001) On macroeconomic policy, effective demand and unemployment : the European experience. Doctoral thesis, London Guildhall University.


Within the EU region the EU member states, by discarding their right to exercise fiscal and monetary policy independently, have signed up to a set of rules and regulations that will eventually lead to European and Monetary Union (EMU). These set of rules as reflected by both the Maastricht criteria as well as the Stability and Growth Pact, contain no reference to either the unacceptable levels of European unemployment or the balance of trade position. The ensuing wave of criticism directed at the motivation as well as the rationale behind such a stringent set of rules and regulations has caused a lot of uncertainty to emerge as to what the future of such an economic venture would be.

The primary objective of this thesis is to investigate the existing problem of European unemployment within the new economic environment that emerged after the demise of Bretton Woods and most crucially after the ratification of the Maastricht Treaty. Further, it develops an alternative demand-based macroeconomic framework on the basis of which the undertaken econometric analysis provides evidence in support of our approach. In particular, by examining the way macroeconomic policy has evolved after the demise of Bretton Woods and questioning the premise with which the new economic orthodoxy has established its authority in euroland, we review the current position of EMU countries in relation to the convergence criteria. It is argued that the deflationary bias in conjunction with the institutional arrangements peculiar to an independent European central bank (ECB) undermine the potential of future economic policies to deal with persistent levels of unemployment. Moreover, it is sustained that the absence of a strategy tailored to stimulate economic activity together with the underlying deflationary nature implied by convergence criteria, may be potential factors that contribute to the perpetuation of high levels of unemployment. Lack of demand in conjunction with the prevalent instability in the labour markets have harmed productive efficiency and most importantly the creation of additional capacity on which employment could be encouraged. Therefore, a case for policies designed to boost aggregate demand is made.

In pursuing our objective, a post Keynesian macroeconomic framework provides the theoretical underpinnings on which the empirical investigation is based. On the methodological front, panel data analysis is applied to EU countries. The results obtained suggest that unemployment in Europe is a by-product of economic policies devoid of any measures to affect demand as well as supply factors. Moreover, on the basis of the evidence,
the deflationary bias that characterises the EU economies especially after the ratification of the Maastricht treaty appears to have dampened economic activity and hence employment in most EU member states.

Some further investigation into the rationale behind the introduction of the Stability Pact yields additional evidence casting considerable doubts on two of the most fundamental reasons put forward in defence of the Stability pact, namely the fear for interest rate spillovers across the EU economies and the significant role of national savings in conditioning investment.

Finally a concluding chapter provides some alternative policy recommendations.

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