Academic journal article Journal of Management Research

Tracing the Political-Economy Background of the Contemporary Crisis

Academic journal article Journal of Management Research

Tracing the Political-Economy Background of the Contemporary Crisis

Article excerpt


Economics goes back a long way under shifting political conditions. The Keynesian state's macro-economic form of intervention actions, which developed just after the Second World War, was a clear answer to the structural economic crisis of the inter-war period of the 1920s and 1930s. The Keynesian economic theory was in many senses deduced from classical economic theories. Correspondingly, today we see the Keynesian principles being transformed but prolonged, despite change of framework. The ongoing financial and debt crisis needs an answer of solution, and the answer seems to be found in principles which could be traced and identified as neo-Keynesianism and neo-interventionism. This paper is tracing and analyzing the political economy of the historical democratic capitalism.

Keywords: Political economy, Economic theory, Economic crisis, Interventionism, Keynesianism, Transformation

1. Neo-Interventionism and Neo-Keynesianism of Today

There is an ongoing crisis in Europe, characterized by being both a credit and a financial crisis. Measures are needed, therefore causing the EU to become active as an interventionist state in the sense of what John Maynard Keynes recommended (1936). However, principally the framework has change and is new, thereof the introduction of the concepts of neo-interventionism and neo-Keynesianism.

The EU has made important interventionist steps to counteract the crisis, particular deeply experienced in member states like Greek, Italy, Spain, Portugal, Ireland and Hungary, by claiming firmly reduction in public spending, reducing salaries and lowering pensions. On the other hand the EU established a stability fund near 1000 billion euro to help states in trouble. In December 2011 the European Central Bank (ECB) presented an intermediary but long term solution to heal the actual debt problems of certain states; the Long Term Re-financial Operation (LTRO). The aim of the operation is to support the banks with money by an exchange procedure: Banks sell expensive old bonds and gilts, turned over in the market with 6 - 9 per cent interest rate, to the ECB and get fresh money in return. The banks agree on paying the money back in three years times at the same price. For the money the banks need only to pay an interest rate of only 1 percent in return. The measure is meant to secure the bank's liquids. The common understanding is that the banks use their money to buy new state bonds and gilts to secure access to financial assets for those countries. In the first round of exchanging money euro 500 billion were taken over from the ECB by the national banks, and the amount has been more than double since then. The problem with this measure which makes it intermediary is that the debt as such has not disappeared. What is needed is real economic growth and creation of jobs.

The supranational EU interventionism in the wake of the ongoing crisis also aims to lower the degree of devolution and national independence. Europe took a major step towards full fiscal union last year, as every EU member country, except the UK and the Czech Republic, vowed to cut budget deficits and submit themselves to greater scrutiny from the European Commission.

The EU member states, 25 out of 27 states, voted for the so called "Financial Pact", which gives the EU and its institutions the authority to control member states ability and political will to keep their national budgets in accordance with EU economic and financial rules and regulations. The agreement is seen as a significant victory for German Chancellor Angela Merkel, who spent months pushing for eurozone members to agree on tighter budgetary constraints. Under the treaty, signatories will agree to cut budget deficits and reduce national debts as a proportion of their economic output or face "automatic" fines, likely to stand at 0.5 per cent of GDP. Sanction will be put in place if the national debt exceeds 3 per cent of the GNP. …

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