Demand-led growth and macroeconomic policy regimes in the Eurozone: implications for post-pandemic economic policies

The Covid-19 Crisis hit the Eurozone asymmetrically, while it was already in a fragile situation due to insufficient recovery from the Global Financial Crisis, the Great Recession and the Eurozone Crisis. The Eurozone stagnation before the Covid-19 Crisis revealed the severe problems of its economic policy institutions and the economic policy model based on New Consensus Macroeconomics (NCM). First, in ‘normal’ times, there are no mechanisms that prevent rising current account imbalances and divergence among member states. Second, in the Eurozone crisis, it became clear that nominal interest rate policies of the European Central Bank (ECB) were insufficient to stabilise aggregate demand and economic activity. Third, and the main reason for the Eurozone Crisis, the role of the ECB as a ‘lender of last resort’, not only for the banking sector but also for member state governments, was unclear at the beginning of the crisis and has only partly been remedied since then. In this chapter we will review the shift in European Union (EU) demand and growth regimes after the Eurozone crisis and outline the role of the macroeconomic policy for regimes and regime shifts, using the post-Keynesian macroeconomic policy mix as a benchmark for a stable domestic demand-led regime targeted at full employment and stable inflation. Finally, we will assess whether the EU economic policy response towards the pandemic has led to fundamental changes away from the NCM and towards a more post-Keynesian policy mix.