Review of Keynesian Economics

The impact of fiscal austerity in the Eurozone

Gennaro Zezza * *

Keywords: fiscal policy, fiscal multiplier, Euro, trade imbalances


This paper presents a framework to assess the likely impact of fiscal austerity in the Euro area, as a response to the turmoil in the financial markets. We provide some evidence on the sequence of events which generated public deficits and debts, and show that rising debts and deficits were the outcome of the external shock which hit the European economies from 2007 onwards, given the institutional setting, rather than the cause. After reviewing the theory supporting austerity as a solution to the crisis, we discuss the macroeconomics of austerity with the help of a stock-flow-consistent accounting structure in the context of a Keynesian–Kaleckian approach.

Author Notes

I wish to thank Tom Palley and Anwar Shaikh for useful comments to a previous draft, Alberto Bagnai for many fruitful discussions, and Ambra Altimari for research assistance. Any remaining errors are my sole responsibility. Financial support from MIUR is gratefully acknowledged. The author can be contacted at

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