Fifth Roundtable of the Next Left Economic Circle - Austerity in Europe: a critical Post-Keynesian approach and the Canadian example

Guest speaker Marc Lavoie, Professor in the Dep. of Economics at the Univ. of Ottawa, argumented the Critical reflections on fiscal consolidation as part of stock-flow consistent models, with a retrospective of Canadian cases. He explained the finance function in a closed economy, the imbalances in the euro area and the Canadian case of budgetary consolidation from 1995.

The imbalances in the Eurozone

Lavoie argued that it would be possible to obtain the same convergence of fiscal balances and current account if the northern countries of the euro area which are in good shape (Germany, Netherlands) adopted stimulus policies by government spending like stimulus wage policies to increase domestic demand. This will help to reduce trade imbalances, and increase the GDP of the South.
An alternative is to have a single government in Europe. The present structure of the European Union would need to be modified, said Marc, giving far more spending and taxing power to the European Union Parliament, transforming it into a bona fide federal government that would be able to engage into substantial equalisation payments which would automatically transfer fiscal resources from the more successful to the less successful members of the euro zone.
All countries of the euro area cannot benefit from current account surplus. Government deficits in the euro area are not necessarily due to an irresponsible fiscal behavior. These public accounts deficits can also occur due to poor sales performance; or because other countries in the euro area (Germany) have improved their market position on the European and world markets (eg., the competitive disinflation), causing budget deficits and current account deficits of other countries, which transforms the euro overvalued currency for the other euro countries.
The current structure of the euro area is at fault, the assumption that governments will never have to meet a financial crisis caused by the private sector.

The Canadian case of budgetary consolidation from 1995

Lavoie showed that during the campaign for the leadership of the Progressive Conservative party in 1993, the deficit and debt were becoming major issues, although the issue of unemployment remained the nº1 concern of citizens. The Liberal Party won the elections (1993-2006).
Canadian bankers were asking international rating agencies that the AAA rating of the federal debt is lowered. But Moody's Sees No Significantly negative trends in the Federal or public-sector outlook which would justify Changing the AAA rating. In October 1994, Finance Minister Paul Martin made the deficit a priority.
There were deleterious effects on the Canadian health system with a very high reduction number of nurses and doctors.
Harper, Prime Minister of Canada, June 11, 2012 in Montreal said: "Economic growth and sound public financial management are inseparable. The world needs an approach that combines budgetary discipline and other measures of growth. To sum up, an approach that works: the Canadian approach. "


The roundtables of the next Left Economic Circle bring together economists from different European institutions, civil society organisations and the business sector, who wish to evaluate the economic theoretical corpus behind economic policy proposals. The roundtables consist of regular public meetings, co-organised by the Foundation for European Progressive Studies (FEPS) and the Global Progressive Forum (GPF). The Next Left Economic Circle is co-chaired by Liem Hoang-Ngoc (MEP, S&D Group at the European Parliament, Professor of Economics at Paris I University) and Stephany Griffith-Jones (FEPS consultant and Professor of Economics, Columbia University).

A simple model of three economies with two currencies: the eurozone and the USA (article in pdf)

See the former roundtables of the next Left Economic Circle


Marc Lavoie is Professor in the Department of Economics at the University of Ottawa, where he started teaching in 1979. Besides having published more than 100 articles in refereed journals and more than 60 chapters in books, he has written a number of books, among which Introduction to Post-Keynesian Economics (2006), translated into four languages, Foundations of Post-Keynesian Economic Analysis (1992), as well as Monetary Economics: An Integrated Approach to Money, Income, Production and Wealth (2007) with Wynne Godley, a book which deals with the stock-flow consistent method. With Mario Seccareccia, he has been the co-editor of three books, including one on the works of Milton Friedman, in addition to writing the first Canadian edition of the Baumol and Blinder first-year textbook (2009). Lavoie has also been the associate editor of the Encyclopedia of Political Economy (1999), and he has been a visiting professor at the universities of Bordeaux, Nice, Rennes, Dijon, Grenoble, Limoges, Lille, Paris-Nord and Paris-1, as well as Curtin University in Perth (Australia). He has lectured at the post-Keynesian summer schools in Kansas City, the Levy Institute and Berlin