The financialization of the EU economy and the case for a prudent use of MMT: Moving beyond the neo-Keynesian and the supply-side paradigm

The outburst of the crisis in the eurozone turns out to be an inevitable sequence of events after years of steadily rising leverage and debt ratios. The private credit flows initially thought of in the mainstream economics as a stabilizing and growth enhancing force turned sour five years ago and mired the majority of EU economies in the state of lower potential output, higher unemployment rates and even higher levels of both private and public debt. The main debate in the process of designing the anti-crisis policy measures so far has revolved  around two diametrically opposed paradigms: neo-Keynesian and supply-side camps. The neo-Keynesian paradigm relies on the policy toolkit targeted to boost aggregate demand via laxer fiscal and monetary policy. On the other hand, supply-siders advocate structural reforms as a sufficient condition for tracing the path of the current economic malaise, often garnished by moral tales of responsibility and thrift. Beyond that, we introduce the possibility of using the MMT (modern money theory) as a third and more synthetic approach, which postulates the crisis-combating potential of creating sovereign money and takes into account economic constraints of higher inflation. It bundles MMT with structural reforms at the national level and the redesign of the monetary union architecture together, which offers a comprehensive way of eliminating negative side-effects of financialization and keeping EU as a viable political and economic entity.