1. A general theory of austerity

This chapter is highly ambitious in scope. It will first look at whether, from a strictly macroeconomic point of view, fiscal austerity was necessary. The conclusions are stark: for the world as a whole austerity could have been easily avoided. In a few Eurozone countries some austerity was inevitable, but unemployment at the levels we have actually seen could almost certainly have been avoided. The macroeconomics needed to establish this proposition are standard and discussed in a later section: the allusion in the title to the General Theory of Keynes is deliberate. The next section of the chapter looks at whether financial market pressures meant that beneficial delays to fiscal consolidation could not have been implemented. This prompts an obvious question. If austerity was unnecessary, why did it happen? On the one hand it is possible to tell a story about why austerity occurred that depends on two historical accidents: the Greek debt funding crisis and the peculiar diminished role that Keynesian economics plays in German policy discussion, coupled with Germany’s central role in reacting to the Greek crisis. For various reasons a story along these lines is seriously incomplete, and in particular cannot play more than a walk-on role in developments in the