VoxEU Column Macroeconomic policy

Solving the macroeconomic policy challenge in Europe

Five years after the subprime bubble burst, the self-correcting nature of business cycles is being questioned and, subsequently, orthodox macroeconomic policy is starting to be challenged. This column introduces a radical rethink of options open to macroeconomic policymakers, suggesting that in order to simultaneously achieve economic stimulus without increasing debt, new money creation should be used to directly finance on-going budget deficits.

Countries in Europe are either slipping into recession or experiencing worsening depression. Economies are headed in the wrong direction, and the malaise is spreading. The current orthodoxies are failing.

An alternative macroeconomic policy strategy

There is a growing group of economists who believe that current policies are failing to achieve the required objectives in the new era of high public debt. Paul Krugman, Randall Wray, Willem Buiter, Satyajit Das, and Samuel Brittan, to name but a few. There are significant recent examples of a search to identify an alternative macroeconomic policy strategy that provide economic stimulus without adding to public debt:

  • Lord Adair Turner called for consideration to be given to employing still more innovative and unconventional monetary policies (Croucher 2012).
  • A Financial Times editorial subsequently recognised the need for the UK government to consider alternative monetary and fiscal policy strategies (Financial Times 2012).
  • Martin Wolf (2012) also indicated that he might support central bank funding of extra spending and said that closer cooperation between monetary and fiscal policy would be sensible.
  • Mark Carney appears to be willing, perhaps, to consider alternative approaches.

My new book (Wood 2012) takes these calls seriously, and gives analytical form to the suggestion that alternative policies are needed to restore internal and external stability. It challenges a number of the central orthodoxies that are driving current macroeconomic policy responses to the global economic crisis, including fiscal austerity, quantitative easing and conventional bond financing of budget deficits.

Macroeconomic policy for flagging demand and high debt

The book proposes unorthodox macroeconomic policy that is, I believe, particularly well-suited for nations with flagging aggregate demand and high debt. The proposed strategy would work to create economic growth without increasing public debt or inflation. The new strategy is relevant whether countries stay inside or leave the Eurozone.

In a nutshell, the thesis argues that:

  • Conventional new bond financing of on-going budget deficits will continue to add to public debt, raising the risk of recurring financial crises.
  • Austerity policies are depressing demand, output and employment, and also add to public debt by reducing tax revenues.
  • For periphery countries in particular, monetary policy is set to act ‘defensively’ (periodically lowering bond interest rates to below 5 or 6%), and new money does not reach the unemployed, the disadvantaged and the real economy generally.
  • Policies need to be radically altered to provide economic stimulus without increasing public debt or inflation.

To achieve these objectives simultaneously, new money creation should be used to directly finance on-going budget deficits. This can potentially be achieved by finance ministries acting alone or in cooperation with central banks.


Croucher, Shane (2012), ”FSA's Turner Calls for More 'Unconventional' Monetary Policy from Bank of England”, International Business Times, 12 October.
Financial Times (2012), “UK needs to talk about helicopters”, editorial, 12 October.
Wood, R (2012), How to Solve the European Economic Crisis: Challenging orthodoxy and creating new policy paradigms, CreateSpace Independent Publishing Platform, 11 Dec.
Wolf, M (2012), “Britain does not have to accept stagnation”, Financial Times, 18 October.

2,940 Reads