Introduction

While the Eurozone was originally designed to protect member countries from economic instability, it has now turned into a major source of instability for the world as a whole. Currently European leaders bring Europe ahead in the direction of a European Federation not because it is part of their vision, but because it seems to be the only way to avoid triggering a global depression.

When the Eurozone was established there were warning voices that a monetary union without a common fiscal policy would be vulnerable to external shocks. The total budget of the EU constitutes only a few percent of the total GNP for member states and therefore it cannot play the same role as the federal budget in the United States as automatic stabilizer. This is especially problematic for a currency union bringing together countries at very different levels of economic development. There were elements in the Lisbon Strategy that could have reduced the gaps between Northern and Southern Europe. But the turn towards more neoliberal solutions that took place around 2005 undermined its capacity to function as a scaffold for the Eurozone (Lundvall and Lorenz 2011).

In this chapter I show that the countries in the Eurozone now most exposed to financial speculation are the ones that have the weakest industrial structure with the biggest proportion of workplaces directly exposed to competition with emerging economies. On this background I will argue that, standing alone, neither Austrian austerity nor Keynesian policies can help establish a sustainable Eurozone. There is a need to design Keynesian policies coordinated at the European level in such a way that they promote deep institutional change in education, labour market and industrial policy in Southern Europe.

Public expenditure needs to be allocated to stimulate the learning capacity where it is weakest – this is why the solution may be referred to as a ‘new new deal’. It is about redistributing learning capacities.

Innovation and the Division of Labour

The following analysis builds upon a simple theoretical model linking to each other ‘innovation as an interactive process’ and the dynamics of the division of labour (Lundvall 2006). According to Adam Smith the extension and deepening of the division of labour is the major mechanism behind economic growth.