The New Paradigm Papers of the Month March

Once a month the Forum New Economy is showcasing a hand full of selected research papers that lead the way towards a new economic paradigm.




7. MARCH 2022



Towards New Fiscal Rules in the Euro Area?

Catherine Mathieu, Henri Sterdyniak

 Two years into a global pandemic and faced with new expensive sanctions and economic aid due to the Russian war on Ukraine, European national debt levels are on the rise. The EU Commission is reacting to this development and has recently announced that European debt rules could remain at least partially suspended in 2023. According to EU Commission Vice President Valdis Dombrovskis, the so-called twentieths rule for heavily indebted states will not be applied next year either [1]. Suspended in 2020 to give countries more leeway to cushion the impact of the COVID-19 pandemic, the debate around the return of the debt rules, or potential reforms thereof, is as present in Brussels as ever. A recent contribution by OFCE economists Catherine Mathieu and Henri Sterdyniak renews the call for a reform of the Euro Area fiscal rules, arguing that Euro area member states should be able to choose their domestic fiscal policy in an open coordination framework, rather than being forced to adhere to strict numerical targets. To achieve this, they propose that fiscal policy in the euro area should draw on functional finance principles, targeting both economic and social objectives. The authors also recommend the issuance of safe public bonds at an interest rate controlled by the central bank, and a public debt that is guaranteed by the ECB.

Begging thy coworker – Labor market dualization and the slow-down of wage growth in Europe

Lukas Lehner, Paul Ramskogler and Aleksandra Riedl

For decades, policies following the neoliberal paradigm have promoted market-driven globalization, disruptive technologies and labor market deregulation. But does the structure of labor markets – and the possibility to employ temporary workers – really aggregate wage growth? This question ties closely with the debate around the overall quality of jobs (“good jobs versus bad jobs”), that has prominently entered the agenda both in the US under Joe Biden and in Germany within the Traffic light coalition. The policy debate refers to the impressive growth of lower-paid precarious jobs in the past four decades that have contributed to wide-spread uncertainties, popular discontent, and the rise of populism. A recent contribution by Lukas Lehner, Paul Ramskogler and Aleksandra Riedl takes a closer look at the debate and the reasons for the delayed pick up of wage growth after the global financial crisis, despite heavy labor market deregulation. Taking on a particular focus on structural labor market aspects, the authors incorporate labor market dualization into the standard Phillips curve. Taking into consideration data on wage growth in 30 European countries in the period 2004-2017, the authors find that the presence of workers with temporary contracts in Europe’s labor markets has slowed down aggregate wage growth due to the competition that temporary workers exert on permanent workers. This competition is most pronounced in countries where trade union density is low. Moreover, they establish that labor market dualization has been at least as important in slowing wage growth since the financial crisis as unemployment, i.e. the observed flattening of the Phillips curve, hence offering valuable insights into the debate around the labor market impact of ‘bad jobs’ and overall labor market paradigms.

Anti democratic attitudes: The influence of work, digital transformation and climate change

Andreas Hövermann, Bettina Kohlrausch and Dorothea Voss

Europe and other parts of the world have been taken over by a wave of populist sentiments in recent years. The fact that populists were elected in protest in many countries at a similar point in time points to a common denominator. Why are people turning away from the democratic system and no longer put their trust in the political and social rules? A new policy brief by IMK researchers Andreas Hövermann, Bettina Kohlrausch and Dorothea Voss takes a closer look at the relationship between social circumstances and democratic integration, based on data from a representative public opinion poll. Their paper comes at a crucial point in time, where decarbonization, digitalization and the recent geopolitical ruptures are triggering change and challenging democracy. The authors show that people in objectively precarious circumstances are denied access to opportunities for democratic participation and that subjective perception also plays a role in anti-democratic attitudes: the lack of recognition is experienced as devaluation of one’s own social and professional status. Policies aimed at reducing anti-democratic attitudes will have to take these insights into consideration.

Monetary solidarity in Europe: can divisive institutions become ‘moral opportunities’?

Waltraud Schelkle

Not least since the Euro crisis has the trust in the self-healing powers of markets been eroded, and with it came the question how to better protect the European monetary union from future panics and risks. Today, one of the biggest challenges facing the euro zone is the continuous divergence of member states and the disagreement among members over what reforms are necessary to ensure the union’s survival. Recently, against the onset of the COVID-19 pandemic, demands for solidarity, common recovery strategies and risk-sharing (e.g. through the pooling of public debt) grew louder yet again. The onset of the Russian war against Ukraine has only reinforced the debate between the executives of member states around the political quest for more solidarity in dealing with European crises.

Against this highly relevant background comes a recent publication by Waltraud Schelke, Professor in Political Economy at LSE, who analyzes how and why risk sharing among members and inter-state solidarity may expand, hence offering valuable insights with regards to the question whether the common currency can and will be politically sustainable. The paper addresses the question generally and for a critical case of a divisive institution, i.e. the evolution of sovereign bailout funding in the Euro Area since 2010 under the umbrella of the ESM. In it, Schelkle finds that if a divisive institution like the ESM can be shown to follow an expansionary logic, projecting commitment rather than the suspicion of moral hazard, it is likely to hold in less adverse circumstances.

Black swan -or- black boxed economics: applying ontology, Keynesianism, and constructivism to policy and market analysis

Christian Hernandez

Latest since the critical financial crisis in 2008, the market-liberal paradigm has been criticized for its failure to adequately predict and prevent crises. But why are mainstream economists so often surprised by financial crises?An ever-growing mountain of empirical evidence indicates that large parts of today’s crises are to be linked to the ontologies, effects and ultimately collapse of the market-liberal paradigm that has guided policymaking in most of the world since the 1970s. A recent contribution by Boston University researcher and political economist Christian Hernandez takes a new look at this problem by analyzing prevailing economic theories’ metaphysical commitments – what they presume there is to observe, interact with, and know. Following the crisis of mainstream economics, an ontological turn has birthed several multidisciplinary economic syntheses that try to better grasp the ‘real-world’. The paper situates these streams within the broader economic ontological turn and interrogates the concepts of black swans vis-à-vis post-Keynesian understandings of business cycles, demand-side logics, and Modern Money – thereby outlining new analytical frameworks for real world crises.



After decades of overly naive market belief, we urgently need new answers to the great challenges of our time. More so, we need a whole new paradigm to guide us. We collect everything about the people and the community who are dealing with the question of a new paradigm and who analyze the historical and present impact of paradigms and narratives – whether in new contributions, performances, books and events.