This contribution focuses on a coherent new way of thinking about the macroeconomy in terms of both economic theory and economic policies. The central bank should focus on financial stability; for fiscal policy in the short term and in the long term to address demand issues is very important. Interest rate policy should be such that the real rate of interest is in line with trend rate of growth in the economy. Fiscal and monetary policies, though, should be coordinated closely. Major central bank cooperation and intervention in the foreign exchange market is necessary to control the exchange rate. Regional and industrial policies to create the required capacity are important, along with incomes policies, to contain inflationary/deflationary pressures. Distribution of income and wealth is another important policy dimension in view of its importance in terms of the great recession.

The purpose of this paper is to compare new developments on the monetary policy front, or what is known as inflation targeting, with some of Keynes's ideas as propounded in a pamphlet in 1932. A number of the ingredients of the new monetary policy approach can be found in Keynes, especially that of central bank independence. However, new monetary policy is a major policy prescription closely associated with the New Consensus Macroeconomics. The ideas and policy implications of this new consensus, however, are very different from Keynes's ideas on central banking and monetary policy. We explore these propositions in this contribution.

First paragraph

This special issue of Intervention. European Journal of Economics and Economic Policies is devoted to Geoff Harcourt, self-proclaimed Australian patriot and Cambridge economist. His work is squarely within the Political Economy approach to economics. In 2010 Geoff Harcourt decided to return back to his Australian roots and it is for this reason that the organisers of the 7^th international conference, Developments in Economic Theory and Policy, Bilbao (Spain), 1–2 July 2010, Department of Applied Economics V, University of the Basque Country, and Cambridge Centre for Economic and Public Policy, University of Cambridge, set up two sessions to celebrate Geoff Harcourt's work. The editors of Intervention very kindly offered to publish the proceedings of the two sessions in this issue. Not only did Geoff Harcourt attend the conference, he also contributed to the sessions. This special issue begins with his contribution.

Current macroeconomics, the ‘New Consensus Macroeconomics’, downgrades significantly the role of fiscal policy as a stabilisation instrument of macroeconomic policy. This paper argues that fiscal policy deserves to be properly upgraded. More recent theoretical and empirical developments on the fiscal policy front are closely examined. This examination reveals that these developments lead to the conclusion that fiscal policy is not as ineffective as argued by the ‘New Consensus Macroeconomics’ proponents. On the contrary, it has a strong macroeconomic role. It is also the case that, in view of the ‘Great Recession’, financial stability has been shown to be very important in economic policy but had been ignored prior to it. The paper argues strongly that fiscal policy is actually a strong macroeconomic stabilisation instrument, especially so when it is coordinated not only with monetary policy but also and closely with financial stability policies – with such coordination-embracing income distribution. Fiscal policy should thereby be restored to its proper upgraded role in terms of economic policy. It is, therefore, high time economists and economic policymakers turned their attention more closely and seriously to this aspect and restored fiscal policy to its strong macroeconomic role.

The international financial crisis of 2007/2008 and the ‘Great Recession’ that followed, along with the euro crisis, have highlighted a range of problems and difficulties that are related to some fundamental weaknesses of the euro. There are the well-known difficulties of macroeconomic policies under the Stability and Growth Pact and the more recent Fiscal Compact, including their deflationary nature and the ‘one size fits all problem’ of imposing common deficit requirements on all European Economic and Monetary Union countries. There are also problems with monetary policy in view of the fact that the European Central Bank does not properly possess the functions of a central bank, especially that of lender of last resort. We discuss the reforms that are needed, most important of which is the requirement for a substantial Economic and Monetary Union-level fiscal policy as part of political integration, along with a banking union. In this context the recent proposals of the ‘Five Presidents’ Report’ (; see, also, ) are relevant and the question is whether they will save the euro. It is concluded that the ‘Five Presidents’ Report’ is unlikely to resolve the deep-seated problems, casting a dark shadow over the future of the euro.