Professor Paul de Grauwe
"Without further steps towards political union, the eurozone has little chance of survival"
Ambrose Evans-Pritchard, Daily Telegraph 16/7 2007

The contrast between the macroeconomic management of the US and that of the eurozone during the past five years could not be greater
Where does this difference come from?
The practical men in Frankfurt have become the slaves of a theory telling us that the sources of economic cycles are shocks in technology (productivity shocks) and changes in preferences.
Paul de Grauwe, Financial Times 17/8 2005

There is no doubt that part of the difference can be traced to the fact that the eurozone is a diverse group of countries with very different economic conditions.

Equally important is the power of ideas. As John Maynard Keynes observed: “Practical men are usually the slaves of some defunct economist.”

The practical men in Washington are influenced by a very different set of ideas. These are deeply rooted in Keynesian thinking. In this view, there are not only productivity shocks but also demand shocks. “Animal spirits” – that is, waves of optimism and pessimism – capture consumers and investors.

The theory that so influences the European policymakers is now the dominant one, at least in the academic world. It has been given various names. Let us call it the new classical theory. It is intriguing that a theory developed by American economists is disregarded by the US authorities but is taken very seriously in Europe. It is equally puzzling that Keynesianism, which is utterly discredited in the academic world, has continued to guide the actions of the US authorities in the past 10 years, and even seems to be working.

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