At the end of 2011, the European Union took one further step - albeit without the UK - towards a fiscal union, the latest stage in its efforts to satisfy the markets and bring back stability for the Euro. New rules of fiscal prudence are being put in place: national finances will be in a German straitjacket. True, it was the Germans and the French who first showed that the fiscal rules of the Euro (current account deficit no more than 3% of GDP) could be set aside when recession threatened. No matter, the new rules will be enforced on all.

Political rumblings have continued through the early months of 2012. Most recently, the success of Hollande, in the first round of the French Presidential election, seems in part due to his pledge to re-examine the Merkozy fiscal pact. Nevertheless, let us assume that the EU minus the UK implements its fiscal union. And let us assume that this will progressively calm the markets and take the heat off individual national treasuries. What then?

The German approach, as consolidated over the post-war period, was one of classical fiscal prudence, little influenced by Keynes. In an important sense it did not need Keynes. Year after year, an export surplus in manufactures meant that a gently deflationary fiscal stance at home was not inappropriate. The Germans never had to face the progressive loss of overseas manufacturing markets that afflicted the UK, her political leaders struggling to maintain good levels of employment by demand management without too much inflation.

Now the German model will be imposed on countries whose situation is as tortured - in terms of economic and social re-structuring - as was the British. It remains to be seen how far the German model, set in a Europe-wide context, will allow for proactive public investment programmes of the sort that Keynes envisaged. Without this, the EU is likely to face general deflation and zero or low growth for the rest of this decade.

It is important to be clear as to what the Keynesian message was and was not. Keynes in his General Theory faced an economy with high unemployment, but no confidence among businesses that it made sense to invest. Government had to take the initiative and engage in programmes of public investment: these would not only generate activity and incomes in the here and now, but would also give businesses confidence themselves to invest, confident that those investments would yield returns by the time they came on stream, because of the improved economic situation.

There is a form of Keynesianism - what Joan Robinson used to refer to as ‘bastard Keynesianism' - that reduces his advice to giving out pound notes on the street; and indeed, Keynes would agree that even that would have some beneficial effect. But public investment programmes were key. (This of course then raises long-term strategic questions about the content of such programmes: should they focus on railways and roads, skills and education, nuclear or tidal power?)

This was only part of the Keynesian message however. In How to Pay for the War, Keynes no longer faced an economy with under-utilised resources of unemployed workers and idle factories. Instead he faced the dangers of supply bottlenecks and resource ceilings. No less than the Bundesbank and ECB today, he was vitally concerned to avoid inflation. This required an appropriate mix of industrial planning, consumer rationing, price controls and taxation. (It also required a proper system of economic and industrial statistics: modern systems of national statistics date from then, and were another legacy of Keynes.)

In short, Keynes called for active government to address the challenges of both economic depression and expansion. He sought less to abolish capitalism, more to save it from itself. Market economies could not be expected to look after themselves.