This paper demonstrates through a formal model how the wealth effect created by a stock market boom leads to the expansion of demand and output mostly through debt-financed private consumption. However, inherent in this expansion is the threat of a subsequent contraction caused by the rising burden of servicing debt and falling creditworthiness. The formal analysis captures more precisely these conditions; it shows that, even in the medium run, the growth rates of the wealth in the stock market and of the real economy may move in opposite directions.

The anaemic growth of the European Union/euro area derives from its economic paradigms. The principle 'one size fits all' behind European Central Bank policy activates centrifugal forces. Diverging trends in unit labour costs, external competitiveness and external balances follow. German policy actively supports this. 'Excessive external surplus procedures' against countries generating large surpluses at the expense of domestic consumption (and the partners' rising debt) should be instituted. The Stability and Growth Pact needs modification. The 3% fiscal deficit/ GDP mark may prevent automatic stabilisation. Insistence on the budgetary positions being 'close to balance or in surplus' lacks rationale. When the private sector's propensity to save is larger than its propensity to invest, that requirement cannot be observed. A permanent fiscal deficit may be a secular necessity. Problems related to rising public debt may also need to be addressed. For the euro area these problems could be rendered far less serious than often believed.

The book was completed in the autumn of 1988 and published in hardback almost a year later, but the momentous events of 1989 seem not have overtaken the validity of the argument presented here. The book examines—theoretically and in the light of empirical evidence—the roots of the failure of the Marx‐inspired economic system of socialism, and hence the reasons behind the search of market‐oriented remedies. The twists and bends of this difficult search have led to what in the book is termed ‘market socialism proper’ (MS) as the last station of the ultimately futile reformist road. ‘Real socialism’ has proved non‐reformable, and even MS would hardly match the advantages of the private market economy. This conclusion argued in the book does not justify, however, the laissez‐faire tendency to abandon a number of basic values associated with socialism: major concern for full employment, social care, which in turn imply preservation of a place of substance to state macroeconomic policy, equality of opportunity based on redistribution of income and wealth etc. reflecting the concept of an overall interest of society which cannot just be reduced to a sum of individual self‐interests.

Extraordinary actions taken by EU governments and the European Central Bank (ECB) averted a catastrophe. However, while these actions are acknowledged to be Keynesian, ›we are not all Keynesians now‹. Little has changed in the decision makers' minds. Numerous statements emanating from the ECB and the EU Commission make this point crystal clear. It is worth quoting the opinion of J. Stark, a member of the ECB Board: »There is no doubt that the exceptional fiscal policy measures and monetary policy reactions to the crisis have helped to stabilize confidence and the euro area economy. Following the substantial budgetary loosening, however, the fiscal exit from the crisis must be initiated […] to be followed by ambitious multi-year fiscal consolidation. This is necessary to underpin the public's trust in the sustainability of public finances. The Stability and Growth Pact constitutes the mechanism to coordinate fiscal policies in Europe. […] Sound and sustainable public finances are a prerequisite for sustainable economic growth and a smooth functioning of Economic and Monetary Union.« (ECB 2010: 7) * Vienna Institute for International Economic Studies (wiiw).