Keynes and the International Clearing Union: A Possible Model for Eurozone Reform?

Abstract

Economic and monetary union in Europe, as currently constituted, has a number of structural weaknesses. Large, persistent international payments imbalances necessitate deficit nations to deflate their economies or squeeze social wages in order to restore competitiveness. Surplus nations accrue reserves, with little pressure to maintain related contribution to spending power in the real economy. The asymmetric treatment of credit and debit nations reduces aggregate demand in the Eurozone. This paper examines a solution, first proposed by Keynes, whereby symmetrical treatment of balance of payments transactions may promote economic growth and higher levels of employment. It outlines the key features of the system and highlights the relevance of the solution to the issues faced by the Eurozone.