John Maynard Keynes vs. Friedrich A.

Hayek Implementation of their theories in France and Germany

Andr Feldhof State, Market and Society Course Paper, Final Draft Course Convenor: Dr. Albena Azmanova Date: 6 December 2012

The clash of ideas between John Maynard Keynes and Friedrich A. Hayek can without doubt be called the economic struggle of the 20th century. Although both economists knew and appreciated each other, they were fierce in the way they sought to invalidate each others economic theories. The revolution that Keynes unleashed in economic thinking in the 1930s has been implemented by many governments around the world during the Great Depression of the 1930s and during and after the second World War (Fletcher, 1987, pp. XVIIf). In turn, after the collapse of the Bretton Woods system of which Keynes was a founding father, Friedrich A. Hayeks ideas became prevalent in many governments. The British Prime Minister Margareth Thatcher, in office from 1979-1990, is reputed to have banged Hayeks publication The Constitution of Liberty on the table at a party meeting, saying This is what we believe! (Tebble, 2010, p. 131). The struggle of ideas between Keynesian and Hayekian has also divided political decision-making in the European Union. Differences are particularly noticeable in the economic policy preferences of France and Germany, the two most important economic actors in the European Union. To understand, how a common European monetary and fiscal policy can come about, it is first important to understand what reasons have led France and Germany to follow the Keynesian and the Hayekian approach in their economic policies. This paper consequently discusses the fundamental tenets of Keyness and Hayeks economic theories, and analyzes to what degree these policies have been implemented by France and Germany in the period from 1955 until the signature of the Maastricht treaty in 1992. To do so, the paper is structured in four parts. The first part presents the main tenets of the Keynesian revolution as far as they are relevant for the European economy. The second part contrasts these findings with the tenets of the Hayekian school of thought. In the third part, both economic models are applied to the example of French economic policy from 1955-1992 while the fourth part is devoted to an analysis of German economic policy from 1955-1992. In following, the author concludes and gives a few remarks about the perspective for a common European monetary and fiscal policy.

1. The Keynesian Revolution John Maynard Keynes wrote his Treatise on Money and his General Theory under the impact of the Great Depression in Europe in 1936 (Skidelsky, 2009, pp. 64ff). The world economy had severely contracted; unemployment was sharply on the rise, not only in the United States but also in Europe, and money supply had collapsed (p. 68). Hence, the fundamental question that Keynes sought to answer with his theory was how to lift an ailing economy out of a slump and back to full employment. Neo-classical economists before Keynes had turned to Says Law for a response. Jean-Baptiste Say had postulated that money did not have an intrinsic value; it was a means of exchange which, after an economic transaction, would be exchanged for a new good as soon as possible for fear of sudden depreciation (Grant & Brue, 2007, pp. 130f). In other words, every economic transaction and thereby, the production of every single good, would directly engender a corresponding demand for other goods (ibid.). Keynes (1936) inferred that, if this were to be true, there would always be demand for products and therefore a demand for labour (p. 26). If it were true, involuntary unemployment could not occur (ibid.). Keynes refuted Says Law however on the premise that money was not only a means of exchange but also a store of value (Fletcher, 1987, p. 18). The more individuals decided to hold money in cash (or in liquidity) for various reasons1, the less money was available in the banks that could have been given out to entrepreneurs as a loan to stimulate investment (Skidelsky, 2008, p. 94). At the same time, entrepreneurs could not be certain how much of their liquidity individuals would be willing to spend on consumption goods, so that they had little indication of how much to produce without losing money (ibid.). This is where Keyness model starts. To reduce uncertainty, to boost investment and to achieve full employment, he noted, it should be the governments role to spur demand for consumption and investment goods (Skidelsky, 2008, pp. 166f; p. 176). This would prompt entrepreneurs to invest money and to create jobs. Keynes (1936) identified the level of income as the prime determinant for peoples propensity to consume (pp. 90f) and concluded that a policy which increased peoples net income would also induce them to spend more and to
Motives for holding liquidity can be to have a means of transaction for a purchase, to keep liquidity safe in the expectancy of a bank run or to speculate (Fletcher, 1987, pp. 101ff; Grant & Brue, 2007, p. 436).
1

contribute to the creation of employment. Both areas of economic policy-making, monetary policy and fiscal policy, were important to achieve this goal, said Keynes. Monetary policy was to serve as a means to pump the prime. Since people had a tendency to hold liquidity, there was little money in the financial system that could have served as a basis for loans to entrepreneurs. Keynes therefore held that the central bank had to provide additional funds to the market (Skidelsky, 2008, pp. 174ff). These would take away some uncertainty and boost entrepreneurs confidence to invest, so that they would be able to create new jobs. The resulting rise in income for workers would work as a multiplier, creating new demand for consumption goods and thereby prompting a higher degree of production and of employment (Keynes in Fletcher, 1987, pp. 84f; Skidelsky, 2008, p. 86). Keyness logic was that, as workers spent a part of their increased income on consumption goods, they brought about an income effect for the producers of those goods who in turn, would be able to devote more of their income to consumption (Keynes, 1936, pp. 116f). Since wages and prices were sticky and did not adjust to an increased volume of money in the short run, more money in the financial system would mean a de facto pay rise for virtually all market participants (Grant & Brue, 2007, pp. 427ff). Several economists including Friedrich A. Hayek and Milton Friedman criticized Keynes for this viewpoint, stating that a resolute implementation of his theory would lead to higher inflation and eventually, higher unemployment (Hayek, 1995, p. 248; Fletcher, 1987, p. 194). Keynes replied that the central bank had a duty to keep the price level stable (Skidelsky, 2008, p. 162); however, he failed to provide a detailed account of how this could be done and died just as the implementation of his policies started to produce inflation in 1946 (Fletcher, 1987, p. 194; Hayek, 1995, p. 248). Keynes was careful to specify, however, that expansionary monetary policy alone could not establish or sustain full employment (Skidelsky, 2008, p. 95). Only increasing the money supply could still lead to a situation in which credit was available at low interest rates but not demanded by entrepreneurs, thus creating a liquidity trap (Skidelsky, 2010, Min 07:15). To avoid a liquidity trap and to instill confidence in the markets, Keynes pleaded for expansionary fiscal policy as well. The government, in his view, should engage in deficit spending to finance public and public-private projects which would put citizens into work, increase their incomes and unleash the multiplier effect (Keynes, 1936, p. 95; Grant & Brue, 2007, p. 441). Other

than his critics, Keynes believed that the state was a good economist and that it would waste less money than the private sector; by socializing investment, the economy could be more effectively rekindled than by a policy of laissez-faire (Skidelsky, 2010, Min 12:35; Skidelsky, 2008, p. 164). As the economy started to grow again, company revenues would increase, thereby automatically providing greater tax revenue for the public sector that could be used to offset previous budget deficits (Hansen, 1968, p. 61). Overall, Keyness model of an interventionist monetary and fiscal policy would therefore sustain itself in the long run. Keyness ideas were adopted by many governments during and after the second World War. Keynesian thinking also underlay the establishment of the Bretton Woods system in 1944 by which international currencies were convertible into dollars, while dollars was pegged to the gold standard (Skidelsky, 2008, pp. 114f). While Keyness thinking started a revolution, it was also heavily criticized. Two schools of economic thought, the Monetarist School and the Austrian School offered alternative routes to the Keynesian way to hoist an economy out of an economic crisis. F.A. Hayek was one of the prime thinkers in the Austrian school and probably Keyness fiercest critic. His views shall be detailed in following. 2. Friedrich A. Hayeks route to economic prosperity Friedrich A. Hayek grew up in the tradition of the Austrian school and attached more importance to the ideas of classical and neo-classical school economists like BhmBawerk, or Wicksell than Keynes did (Hayek, 1995, p. 249; Fletcher, 1987, pp. 234f). For Hayek, the fundamental issue was not only how to lift an economy out of a recession, but also how to implement policies which prevent a recession from occurring in the first place. Hayek starts from the contention that all investment in the economy should be taken from money that has previously been saved (White, 2010a, Min 02:16). The interest rate, in his view, shows the relationship between the demand for current consumption and later consumption (ibid.). Those who save money sacrifice the possibility of spending it directly, but in doing so they receive interest from those who want to use the money for investment on the present day. Widespread saving, in Hayeks view, would also increase the supply of investment funds and lower their interest rate, thereby providing a stimulus for new investment (Fletcher, 1987, p. 234).

Hayeks ideas presuppose a more or less closed circular flow of money, however; only the money that has been saved can be invested in return. To bring security into the system, Hayek holds that the central bank should keep monetary policy stable so that inflation cannot take hold (Fletcher, 1987, p. 230). In Hayeks view, a recession looms when too much bad investment occurs, i.e. when economic actors finance their consumption through credit or engage in activities that are not economically sustainable (Selgin in LSE, 2011, Min 34:55). Hayeks solution to avoid an economic slump can be seen a degree of creative destruction. If a company is not competitive in the market at the price at which it was producing, Hayek favors letting it become bankrupt so that its workforce can be allocated to other, more sustainable economic activities (Fletcher, 1987, p. 236; White, 2010b, Min 00:44). This could also mean that workers would have to accept a fall in the wage level, a proposition that Keynes allegedly refused to consider in his General Theory (Fletcher, 1987, p. 238). If, however, as Keynes proposed, the central bank starts the printing press to maintain economic activity at a high level, Hayek holds that it will supply credit without a corresponding expansion of savings; in essence, recovery would only be financed on the back of subsequent inflation (Fletcher, 1987, p. 38). For Hayek, it is inflation that really brings about severe unemployment and economic collapse as entrepreneurs will shy away from investing without the ability to foresee price developments in the future (White, 2010b, Min 03:27). Hayeks critical view of expansionary monetary policy goes hand in hand with a critical view of expansionary fiscal policy. Where Keynes advocates a running of budget deficits to finance public work programs, Hayek sees public spending as an issue of liberty. For him, a greater government budget means that more money is channeled through the public sector, less through the private sector. He holds government spending to be wasteful; resources are better allocated if they are in the hands of many entrepreneurs rather than a single central government institution (Selgin in LSE, 2011, Min. 1:03:35; Fletcher, 1987, p. XVIII, p. 254). Channeling resources through the private sector will prevent the development of an engorged public sector which could develop an institutional interest of its own and lead to a centrally planned economy (Fletcher, 1987, pp. 255f). In his famous publication The Road to Serfdom, Hayek (1971) duly warns that a lack of individual decisionmaking in the economy could lead to a totalitarian state (pp. 45ff; Fletcher, 1987, p.

225). While this does not mean that the public sector does not have any duty in the economy, it does advocate a strong degree of laissez-faire on the part of the government. Hayeks thinking became popular in the 1970s when the implementation of Keynesian theory had brought about stagflation and forced a collapse of the Bretton Woods system (Fletcher, 1987, pp. 234f). It marked a return to laissez-faire which was particularly pronounced in the UK under Margareth Thatcher (between 1979 and 1990) and in the United States under Ronald Reagan (between 1981 and 1889) (Boettke, 2010, p. 157). On the following pages, this paper investigates to what extent French and German economic policies have taken Keynesian and Hayekian thinking into account. 3. The implementation of Keynesian and Hayekian policies in France Between the economic and financial crisis in 1930 and the entry into European Monetary Union, the French government has not pursued a single coherent set of monetary and fiscal policy, but flexible policies adapted to the challenges of the time. In consequence, both Keynesian and Hayekian thinking has been embraced and abolished. In the aftermath of the second World War, the French government pursued an expansionary monetary and fiscal policy to bring about full employment. The government developed a particular tendency to use monetary policy for the management of short-term demand during the 1950s (Hansen, 1969, p. 185). The Keynesian stimulus induced entrepreneurs to invest; full employment was attained in the 1950s and remained in the 1960s (p. 168), but as the multiplier increased wages, it also increased prices. A first inflationary shock surged in 1952, a second inflationary period lasted from 1956 to 1958 and a third from 1959 to 1962 (pp. 163f). The government arguably desired limited inflation in the interest of boosting investment and maintaining full employment (p. 172), but it nonetheless had to resort to temporary monetary controls to combat inflation (p. 163). Following Keyness advice, the government not only expanded money supply but also engaged in deficit spending to boost employment. It expanded the public sector and put employees to work, including a number of economic immigrants who had come to rebuild the country (Hansen, 1969, p. 163). What was more, the social

policies of the 1956 government and Frances war in Algeria from 1955 to 1957 prompted the government to borrow money from the Central Bank and to run an excessive budget deficit (p. 161; pp. 171f). While these policies arguably set the Keynesian multiplier to work, they were also heavily criticized. Hence, a government sponsored report in December 1958 recommended that current expenditure be financed solely by taxes while public investment be financed by selling bonds on the open market (p. 161). The government duly heeded the advice and contracted its budget for 1958, but it took until 1965 that the idea of zero budget deficit took hold (p. 171; p. 161). In 1963, the government changed direction and advocated restrictive fiscal and monetary policies that were more in line with Hayekian thinking (Hansen, 1969, p. 177). Had it used monetary policy for stimulus in the preceding decade, it now occasionally resorted to fiscal policy to bring about growth (p. 161; pp. 177f). A real change towards Hayekian policies occurred a decade later, after the stagflation of the 1970s had brought Keynesian policies into discredit. The government of Raymond Barre between 1976 and 1981 introduced monetary targets to limit the money supply and to control inflation (Galbraith, 1982, pp. 388f; Bliek & Parguez, 2008, pp. 99f). Johann Michel (2008) holds that this is due to a deliberate choice of the government to let go of two Keynesian objectives that had characterized economic policy until then: full employment and a reduction of income inequality (Subheading 2, para. 4). Thus,
(l)e plan Barre marque une premire rupture avec le pass Keynsien : la stabilit montaire passe avant le plein-emploi. La deuxime rupture est le refus d'une politique conjoncturelle et discrtionnaire (Garello in Michel, 2008, Subheading 2, para. 4).

Despite the governments announced goal of curbing inflation, however, prices increased at levels of more than 10% per year even after monetary targets had been introduced (Galbraith, 1982, p. 390; see Figure 1). The following
Figure 1 - Inflation rates in selected European countries. Source: Vickerman, 2011, p. 11.

government under Mitterrand, however, entered into the European Monetary System (EMS) in 1982 which essentially obliged the French government to impose deflation (Bliek & Parguez, 2008, p. 107). A Hayekian policy of monetary contraction cut wages and prompted people to use their savings for consumption (Bliek & Parguez, 2008, p. 107; Llau, 1992, p. 108). The policy effectively reduced inflation to 3% in the period from 1986-91 (see Figure 1) and prepared the French economy for the entry into an increasingly globalized financial system (Llau, 1992, p. 112). Hayekian thinking also entered fiscal policy in the 1980s: Under the impact of economic globalization, the Mitterrand government in 1983 embarked upon a tacit downscaling of the public sector (Michel, 2008, Subheading 3, para. 2) which has continued throughout the following governments (para. 3; Bliek & Parguez, 2008, p. 105). As a result, public sector savings started to increase after 1985 (Llau, 1992, p. 107). By the time that France signed the Treaty of Maastricht in 1992, the French economy had trimmed public spending, stabilized monetary supply and brought its exchange rate into a tight band with the German mark (Vickerman, 2011, p. 10). Overall, it can be said that the French government has changed from Keynesian policies until the 1970s to Hayekian policies in the 1980s and 1990s. The entry into the EMS provided a strong incentive for the government to control its money supply and to give priority to price stability over employment (Michel, 2008, Conclusion). In following, it will be shown how Keynesian and Hayekian policies have impacted upon German economic policy. 4. Keynesian and Hayekian policies in Germany Economic policy in Germany, regardless of the political tendency of the government, has been conditioned by two overriding factors since the 1920s. The first one is the federal structure of the German state; the national, regional and local level have their independent budgets and take their own decisions. There is a degree of coordination between the different levels (especially since 1967, see below) but in principle, the regions and communes are free to borrow money from the central bank to stimulate demand or to contract their budgets and impose austerity (Hansen, 1969, p. 298). In a marked difference from France, the communes accounted for roundabout two thirds of public administrative investment in much of the period under review (p. 209),

while about three quarters of the [federal governments] expenditure on goods and services [was] for military purposes (p. 210). The second factor is a particularly bad experience with repeated hyperinflation in Germany following expansionary monetary and fiscal policies in the 1920s (Issing, 1997, p. 67). As a result, official political philosophy as well as public opinion has been obsessed with budget balancing and even positively hostile to interventionist demand management budget policies (Hansen, 1969, p. 227). The practical lesson that Germany took from hyperinflation was to make the German Central Bank completely independent from the government (Issing, 1997, p. 67). Bearing in mind these two factors which limit centrally orchestrated economic policies (cf. Hansen, 1969, p. 210), it can be said that German governments have implemented both Keynesian and Hayekian policies according to the needs of the time, but with a pronounced focus on Hayekian thinking. In general, four time periods can be distinguished between 1945 and 1992. The first period roughly lasted from 1945 to 1967 and government policy could be described as more influenced by Keynesian than Hayekian thinking. After the second World War, the German economy was in a state of low employment levels and low inflation (Hansen, 1969, p. 232). To bring the economy back into shape, the Central Bank reformed the monetary system and introduced the Deutschmark in 1949. In the period until 1960, it cautiously expanded the money supply to provide the resources for investment and economic growth (Heller, 1950, pp. 543f). This, along with other factors, eventually led to full employment and an increase of wages at the beginning of the 1960s, even though Bent Hansen (1969) asserts that full employment was not Germanys prime objective (p. 62; p. 66). The Central Bank policy also brought about limited inflation but overall, the fifties have been described as a rather stable decade with regard to monetary policy (p. 233). Fiscal policy at the same time was slightly expansionary. While the federal government budget declined slightly, regional and local governments increased their spending (Hansen, 1969, p. 233). This changed significantly at the beginning of the 1960s when regional and local governments, emboldened by increased tax revenue from a growing private sector, increased public expenditure from 1961 until 1967 (ibid.). Towards the middle of the decade, local and regional government expenditure accounted for 3% of GNP growth by themselves (p. 242). Hansen (1969) questions the timing of the Keynesian stimulus policy which, he asserts, came too late to

produce the desired effect (p. 233). After five years of rapid economic growth, the German economy paid its stimulus policy with two years of severe inflation, recession and increasing unemployment in 1966 and 1967 (p. 243). Germanys lesson from renewed inflation was a turn to rigorously balanced fiscal policy. The Parliament imposed a rigid Stabilization Law in 1967 to coordinate the fiscal policies of central, regional and local governments (Hansen, 1969, p. 254). In essence, it stipulated that the federal and regional governments in their economic and budgetary policies have to take into account the requirements of the equilibrium of the national economy (p. 213). The law provided two prime instruments to control governments budgets and to mediate business cycles, namely discretionary powers for the federal government to change income tax by no more than 10% to equalize slumps or booms (p. 218) and more importantly, a conjunctural policy which would feed a conjunctural account in boom periods so that it could subsequently provide stimulus funds in a slump (p. 224). Thus equipped, federal, regional and local governments entered what this paper considers the second period, seven years between 1967 and 1974 in which they imposed upon themselves almost an entire decade without demand management policies. Championed by the Stabilization Law, this period was definitely Hayekian in thought. Not only the devotion to public savings but also the desire to cap opportunities for bad investment (the conjunctural account must never become negative, Hansen, 1969, p. 228) definitely respond to Hayekian ideas. Thus, at the end of the 1960s and into the beginning of the 1970s, the German governments ran stabilization programs intended to reduce public expenditure (Franz, 1990, p. 23). The Central Bank, facing inflation in this period, decided in favor of a restrictive monetary policy from 1973 (p. 20). Like in France, the German Central Bank introduced monetary targets to keep money supply stable (Issing, 1997, p. 68). It was at this time that the stagflation crisis of the early 1970s hit Germany and caused the economy to slump. Indeed, Wolfgang Franz (1990) holds that the recession began in 1973 already and was not caused by the oil price shocks alone, but by a combination of a restrictive monetary policy and supply shocks (p. 20). Towards 1975, rigid monetary and fiscal policy along with other factors had resulted in growing unemployment (Franz, 1990, p. 18). Hence, in the third period between 1975 and 1981, the German governments resorted to a mixture of Keynesian stimulus and Hayekian savings to try and jump-start the economy. The Central Bank

in a very Keynesian manner expanded its money supply for the period between 1974 and 1978 (p. 19), thereby accepting that it would fail to meet its monetary targets in the very first years after their inception (Issing, 1967, p. 69). The federal government used its new discretion for a tax reform, reduced the tax rates and thereby boosted workers income (Franz, 1990, p. 24). One of the core program undertaken was the Investment program for a better future that started in 1977 and lasted until 1981 (p. 23). It consisted of public sector investment in key sectors such as energy, water supply and transportation and was seen as a way to bring about economic growth without repeating the mistakes of previous inflationary periods (ibid.). In this period, fiscal policy, although expansionary and Keynesian in spirit, had a clear Hayekian trait to it. Rather than borrowing money from the Central Bank, the government decided to decrease taxes and to finance its investment program from the conjunctural account that had been created before (p. 24). In other words, the government made sure that it only spent funds that had been previously saved. The final period lasted from 1982 to 1992. It is the period in which Germany entered the EMS and which should later culminate in the signature of the Maastricht treaty. This period was characterized by low inflation and a strong commitment to balance public budgets. It can therefore be characterized as dominated by Hayekian rather than Keynesian philosophy. Shortly after the EMS had been created, it is asserted that many other European countries followed the lead of the German Central Bank in monetary policy to bring their own inflation under control (Karfakis & Moschos in Hafer & Kutan, 1994, 685). Hafer & Kutan (1994) suggest that German Central Bank, long reputed to value anti-inflationary policies very highly, would take developments in other countries into consideration and thereby not only base its policies upon domestic imperatives but adopt a European macro-view (p. 685). Hence, the Central Bank contracted money supply again between 1980 and 1982, and kept it at low levels throughout the decade except in 1983 and 1984 (Franz, 1990, p. 19; p. 26) where Germany saw a surge of unemployment (p. 18). Fiscal policy was arguably not as important in the European context as monetary policy, but governments maintained a rigorous commitment to low inflation and balanced budgets throughout the period from 1982 to 1992 as well (p. 25). In the 1980s, fears of insufficient savings were uttered again as they had been before; allegedly, parts of the public were led to the impression that Germany was on the brink of bankruptcy (ibid.). The governments responded with fiscal consolidation at the beginning of the

1980s and established measures to stimulate private investment such as general investment premiums, special depreciation allowances, and subsidies for housing construction (p. 27). The federal government then followed up with selective tax reductions for individuals in 1986 and 1988 (ibid.). These measures allowed the governments to stimulate investment without incurring public sector deficits. By the time the federal government signed the Maastricht treaty in 1992, inflation in Germany had been brought down from 4% in the period from 1979-1985 to less than 2% (see Figure 1) while the unemployment level in Western Germany was at 5,6% (Stephen, 2010, p. 85). Overall, it can be said that German economic policy has been strongly characterized by Hayekian thinking throughout the period under review. Germany has had a tendency to fear high inflation and to work towards a cap on inflation wherever possible. This has reduced the usefulness of monetary policy as an instrument for Keynesian stimulus policy, but while the target of low unemployment has largely been met, Hayekian monetary policy has also ensured that investment bubbles were not created. Where the German governments wanted to stimulate the economy, they did so via tax reductions rather than deficit spending after the introduction of the Stabilization Law in 1967. Again, this policy mirrored the Hayekian preoccupation to earn money before it is spent; the conjunctural accounts from which governments took the resources for fiscal stimulus could not become negative.

5. Conclusion

The signature of the Maastricht treaty in 1992 started the most ambitious project of the EU up to date: the process of monetary integration and fiscal coordination. Miroslav Jovanovic (2005) asserts that France and Germany had a very different idea of what the role of a European Central Bank should be:
One extreme was the model of Germanys Bundesbank. It was independent from the government in the conduct of monetary policy [] The Bundesbank ensured stable prices, high employment, balanced foreign trade, as well as a constant and reasonable economic growth. The other extreme was the Bank of France, in which the government had a full stake. Thus France wanted to see a kind of accountability of the EU Central Bank to public bodies (Jovanovic, 2005, pp. 120f).

Not only in the architecture of EU monetary policy but also in the coordination of fiscal policies through the Stability and Growth Pact, Frances and Germanys policy preferences widely diverged: Germany wanted to have automatic fines for any eurozone country that has a budget deficit of over 3 per cent. However, France argued that sanctions for excessive borrowing of member states must be a political matter (Jovanovic, 2005, p. 129). It can be seen from the preceding analysis that Frances and Germanys diverging attitudes toward harmonized monetary and fiscal policy are consistent with their policy choices throughout the second half of the 20th century. France has for a long time been guided by Keynesian theory which empowers a government to reduce unemployment in the short term and may therefore boost its legitimacy. France only embraced Hayekian budget discipline in 1976 as a result of the stagflation crisis that brought Keynesian thinking into disrespect. Germany, on the other hand, conditioned by its bad experience with hyperinflation in the 1920s, imposed itself tight monetary policy and more or less rigid budget discipline for much of the period between 1945 and 1992. The exception was the period in the early 1960s when Germany had attained full employment. Greater tax revenues induced regional and local governments to spend money rather than to save; the consequence was a law imposing tight fiscal discipline in 1967. This has remained Germanys economic policy until the entry into the European Monetary Union, albeit with small surges of Keynesian interventionism along the way. At the time of writing, the European Fiscal and Monetary Union is far from complete; indeed Germany and France are at odds about the manner in which monetary and fiscal policy can lift the European economies out of the crisis. Yet, the future of economic growth in the EU to a large degree depends on the policy choices taken by France and Germany. The intellectual struggle between Keynes and Hayek, it appears, is still far from resolved.

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