The Euro Area: Policy Lessons from a Minsky/Kaleckian Approach

Financial and macroeconomic instability endogenously arises from within the system: this was the conclusion of Hyman Minsky’s PhD dissertation at Harvard on the 1929 Great Crash and the dynamics of a capitalist system. In light of the 2008 Great Financial Crisis, his financial instability hypothesis seems to be almost prophetical. The goal of thesis is to investigate the Euro Area’s macroeconomic instability according to this interpretative framework. The objective is twofold. On the one hand, the research aims at disentangling the causes leading to the current divergence in growth and unemployment rates between Northern and Southern Euro Area countries. On the other hand, it aims at assessing the effectiveness of economic-financial reforms implemented in the aftermath of the crisis, and provides policy implications to stabilize the European macroeconomic system. Chapter I presents and critically discusses Minsky’s business cycle theory and frames the context that eased and allowed the Great Financial Crisis to happen. Chapter II presents the Euro Area’s imbalances, and through a VAR methodology characterises the growth strategy of the Northern and Southern blocks as well as the source of intra-EA trade imbalances. Chapter III aims at analysing the sources of growth differentials between the Northern and Southern countries focusing on the role investments and unemployment play in constraining and reinforcing path-dependency. According to a Minsky-Kaleckian SVAR approach, diverging and reinforcing factors are detected and discussed. Chapter IV emphasises the importance that financial reforms play in the aftermath of a financial crisis to stabilize the macroeconomic system. To this respect, an analysis and comparison of the major financial regulations at the European and international level is provided. In conclusion, chapter V analyses the impact of the most important financial reform at the European Level - the Bank Recovery and Resolution Directive - which aims at breaking the two-way feedback process between the default risk of banks and sovereigns.