Growth or austerity? That’s the choice facing Europe these days—or so the Keynesian consensus keeps saying. According to this view, which has dominated world economic councils since the 2008 crisis began, “growth” is mainly a function of government spending.
Spend more and you’re for growth, even if a country raises taxes to pay for the spending. But dare to cut spending as the Germans suggest, and you’re for austerity and thus opposed to growth.
This is a nonsense debate that misconstrues the real sources of economic prosperity and helps explain Europe’s current mess. The real debate ought to be over which policies best produce growth.
Then-Chancellor Gerhard Schröder, a Social Democrat, surprised the world, to say nothing of his own voters, by pushing through the labor-market reforms that paved the way for the current relative prosperity. The changes cut welfare benefits and gave employers more flexibility in reaching agreement with their employees on working time and pay.