Modern Monetary Theory, an answer to Euro crisis.

Abstract

As the effects of the crisis became more and more evident, some nations began to show signs of economic decline and some of them started to think about abandoning Euro. Many economists argued that such a proposal was pure mad-ness, stupid and inconvenient if implemented. However, this idea increasingly began to attract attention over time. Numerous hasty and superficial analysis on the use started to flock, stimulating the spread of further opinions and publica-tions. The debate began to deepen and the contrast between the two schools of economic thought (the orthodox and the heterodox neo-classical post-Keynesian) has reinvigorated. The awareness about the seriousness of the matter, though, arose in England in 2011 when a competition with a prize of 250 thousand pounds was organized. The Wolfson prize was awarded to the best piece of aca-demic work which could provide a sensible answer to the question: “If member states leave the Economic and Monetary Union, what is the best way for the eco-nomic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?”. The contest was won by Roger Bootle, with his “Leaving the Euro: a practical guide” which will be dis-cussed in the last chapter. This thesis analyses the global financial and economic crisis from its origins en-tailed in the excesses of Wall Street, until the imbalances in Europe, through the opinions and studies of internationally renowned economists belonging to both schools of economic thought. Particular attention has been given to the economic policies of austerity in Europe and the main macroeconomic effects that these re-strictive policies have had on the member states restrictions, especially on pe-ripheral countries. Consequently the focus will shifts to the Modern Monetary Theory as a theoretical alternative to interpret the reasons for the imbalances in the Euro area. The cen-tral aspect of this theory is the different interpretation of the deficit of the govern-ment budget on the basis of sectorial balance sheets and their mechanism of supporting the economy in the downturn. To conclude, referring to the paper that won the Wolfson prize in 2011 a potential exit strategy with a main focus on Italy is described, addressing the more relevant legal and economic issues. As for economic aspects, a comparison is performed to determine which option was the best among the potential solutions to a long period of austerity or the ordered abandonment of the Euro. Finally, several probable drawbacks are listed that should give pause to the countries in question before making such a drastic choice.