Engines of growth and paths of development in the Euro-area

Since 2008, the EU has been suffering from a steep fall in demand: businesses, households, and governments have been deleveraging simultaneously. Tight fiscal policies, belated monetary stimulus, and perverse adjustment policies have created profound crisis in the European periphery and stagnation throughout the euro area. Given the severity and scale of the crisis, it is threatening the very survival of the monetary union, urging radical change in EU policies. At the global level, the spectre of “secular stagnation” has revived interest in long-forgotten theories. After the liberal phase of the last decades, economists now seem to agree on the need for expansion of domestic demand and a “new” industrial policy, required to tackle the regional divide in the level of development within the Eurozone and, indeed, to respond to the challenges of globalisation and technical change. The first part of the present chapter outlines the historical evolution of the theory of development that helps interpret the development of core-periphery relations within the EU (Sections 2 and 3). The following sections investigate the policies needed to sustain balanced growth within the EU, arguing that the EU must “find a way” to ensure a rebalance between the core and the periphery. This calls for an overhaul of the institutional framework governing the Eurozone and a new role for industrial policy.