In this, the deepest economic recession (at least in the West) in a century, the policy prescriptions of orthodox economics are being challenged by the people of Europe. European leaders advised by neoclassical economists, had agreed to an "Austerity Compact". In the elections on 6th May in France and Greece, respectively, the leaders who had propounded sharp reductions in public expenditure as a means of pulling out of the crisis have suffered a resounding defeat. President Francois Hollande of France, soon after his election victory announced his intention of renegotiating the economic strategy for addressing Europe's crisis. However Mrs. Merkel, Chancellor of Germany stuck to her guns by saying that the fiscal pact agreed by 25 countries was not negotiable.

Underlying the political deadlock is a contention between two schools of thought: the Neoclassical economists and the Keynesians. Just as there was a historic debate between the Classical economists and Keynes during the Great Depression of the 1930s.

The Neoclassical view of conservative European leaders alongwith the IMF, is that the central issue to be addressed are unsustainable budget deficits and rising debt. So slash public expenditure they say, even if it means cutting expenditures on pensions, education and health, let alone physical infrastructure. But how will this help to pull Europe out of the double digit unemployment and growing misery of the underprivileged, made worse as government welfare payments are axed by austerity measures?

The Neoclassical answer to this question is the argument that when budget deficits are reduced, and "financial stability" restored, this will (through a yet unspecified mechanism), create the confidence amongst entrepreneurs to invest, and so economic growth will once again pick up. This proposition which is being propounded with such stridency by the Neo classicists led by the IMF, actually rests on rather weak theoretical and even weaker empirical foundations. How does a mere reduction in the budget deficit induce capitalists to invest especially in the face of falling aggregate demand due to declining consumption expenditure and public sector outlays? To argue that by deepening the recession now, economic growth can be accelerated at some unknown future date, through the mysterious hidden hand of the market, is a kind of oxymoron: unless the causal mechanism between expenditure cuts today and increased investment in the future is clearly articulated and backed by data. Neither exists. As Paul Krugman in a recent article in the IHT has pointed out, persisting with the economic strategy associated with the "Austerity Compact" would be reasonable "...if it were working, or even had a reasonable chance of working. But it isn't and doesn't." Hence the hope in Monsieur Hollande's promise of rethinking policy.

The European policy dilemma essentially emerges from the very concept of a common currency, in a situation where such wide disparities exist in relative economic strength and economic management capacity of countries within the European Union. In the old days a particular European country faced with lack of export competitiveness and slow growth, could devalue the national currency as a quick fix to achieve export led growth. Now this device is not available, given a common currency. So what happens is that the stronger countries as a condition for financial bailout insist on cost reductions through austerity, reduced real wages, and higher unemployment. The events in Greece and France show that the people have rejected this view. That the official economic argument is questionable in terms of its conceptual and factual basis, makes the manifest pain of the people even more poignant.  The protracted recession and associated human suffering requires a fundamental rethinking of economics and economic policy. As Professor Stiglitz in an earlier seminar observed, it is time to "re write the textbooks."