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Torsten Niechoj

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Editorial to the special forum

Making the euro area work: proposals for monetary and fiscal reform

Stefan Ederer and Torsten Niechoj

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Torsten Niechoj and Till van Treeck

First paragraph

The financial market crisis that transformed into a global recession is a challenge for both economic theory and policy. In retrospect, nearly three years after the first signs of the crisis, a few tentative conclusions concerning the appropriateness and effectiveness of the responses to the crisis might be possible. After an initial state of shock, the political system acted forcefully and issued programmes to stabilise both financial sector and the real economy all over the world. Moreover, governments started to talk about an encompassing regulation of the financial sector, which was supported by many economists. This is indeed remarkable compared to what used to be common sense in the years before within advisory bodies – among others the European Commission, the IMF and academic think tanks. Privatisation and liberalisation of markets were, then, thought to be key to increasing the capacity of the economy to absorb shocks and to guarantee high growth rates and economic well-being. Although in that respect politicians and economists obviously did learn from the crisis and began to take seriously alternative ideas which had for a long time been absent in the debates, a ›return to normality‹ is already imminent; the planned fiscal retrenchment programmes, particularly within the European Union, and the deferral of regulatory measures for financial markets are testament to this. The king is dead, long live the king? From today's view it is not clear whether or not, in the longer run, this crisis has really shaken the foundations of economic thinking and policy making.

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Eckhard Hein, Torsten Niechoj and Achim Truger

First paragraph

The world economy is presently suffering from the most severe economic crisis since the Great Depression in the early 1930s. As by now seems to be obvious, the present financial crisis, massive state intervention in the financial markets in order to prevent a melt-down, and fiscal stimulus packages inconceivable even several months ago, mark the failure of an economic policy agenda which might be called ›neo-Liberalism‹. This agenda, broadly speaking, focussed on the deregulation of financial, labour and goods markets and on minimising state intervention. It meant a massive redistribution of income and wealth at the expense of labour and ordinary households, increasing imbalances on the global level and rising financial fragility. The failure of this policy agenda is also a failure of mainstream economic theory which has supported it. In particular those theories which are based on the confidence and firm belief that free markets will be stable and generate a full employment equilibrium – at least in the long run – and that the only role left for macroeconomic policies, in particular monetary policies, is to facilitate and accelerate the adjustment process towards this equilibrium, as for example in the dominating New Consensus Model (NCM), have failed.

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Torsten Niechoj, Özlem Onaran and Sabine Reiner

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In 2012, public debt is still at the centre of attention and economic policies – globally, but especially in Europe. For most of the mainstream commentators the main source of public debt can be traced back to loose public spending behaviour and a lack of fiscal discipline. However, story and facts do not coincide perfectly, to say the least (see also the contributions by Ederer in the forum section of this issue and Niechoj and van Treeck 2011 in the last issue of this journal). To give only one example taken from the European case: In Spain the level of public debt is still below the German level although Germany is the main proponent and an example of presumably sound fiscal policy and a successful recovery after the financial market crisis from the point of view of both the public and mainstream academia. Additionally, the debt-to-GDP ratio of Spain had been falling until 2007, down to only 36 per cent, which is quite low in international comparison and far below the debt criterion of the European Stability and Growth Pact.

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Stefan Ederer, Eckhard Hein and Torsten Niechoj

First paragraph

The financial and economic crises which started in 2007 have triggered and motivated increasing research on finance and the instability of the financial system but also on the relationship between finance, distribution and growth. This special issue discusses various, but related theoretical and empirical aspects of finance, instability, distribution and investment.

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Eckhard Hein, Torsten Niechoj and Engelbert Stockhammer

First paragraph

During the recent decades the financial sectors of developed and developing countries as well as global financial relations have changed remarkably. The overall importance of financial factors for real investment and growth of non-financial business has risen, as has the financial activity of non-financial corporations. Power relations between shareholders in joint stock companies, management, and labourers seem to have changed. The development of new financial instruments, together with the booms in stock market and real estate prices, has increased the potential for wealth-based and debt-financed consumption. As a result of these developments financial fragility (Minsky 1977) has increased. The current financial turbulences, generated by the sub-prime mortgage crisis in the USA and spreading over international financial markets since summer 2007, may be seen as a result of this increased fragility. Finally, global financial relations and conditions have changed with the rapid development in Asia and the associated current account surpluses, in particular in China but also in Japan.

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Sebastian Gechert, Torsten Niechoj, Engelbert Stockhammer, Achim Truger and Andrew Watt