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How welfare states and Keynesian policies destroyed Europe’s economic growth


image credit: cnnmoney.com

“The answer is more Europe, not less,” proclaimed German Chancellor Angela Merkel two months ago shortly after committing to yet another stimulus plan with Italy, Spain and France to promote economic growth in Europe.


Europeans have become accustomed to frequent proclamations and promises of this kind since the world’s financial crisis morphed into a sovereign debt crisis exposing the socialist European economies for the houses of cards they always were.

Amidst this sea of promises and empty upbeat political rhetoric, economic growth has yet to appear. Instead, countries all over the continent keep mortgaging their citizen’s futures whilst assiduously extending the freedom restricting tentacles of state control into new realms of economic activity.

Wrong diagnosis equals wrong Keynesian medicine

Yet, newspapers, politicians and governments keep uniformly insisting that the State is our savior and sole engine of economic growth in countries across the European continent. This Keynesian fallacy, that government spending propels an economy forward, is not only wrong, but  dangerous.

Economic growth is driven by increases in productivity, i.e. we produce more with less or the same inputs. Keynesian statesmen across Europe will begrudgingly acquiesce on this point, but not before extolling the supposed virtues of counter cyclical Keynesian deficit spending when the business cycle turns.

Such Keynesian fiscal policies have supposedly worked well in the past during short-lived recessions. Yet, once evaluating the economy from the perspective of decades and not quarters, it is apparent these policies have wreaked extreme havoc and impeded capitalism’s wheels of creative destruction from turning.

The wheels of economic progress

That Capitalism constantly rejuvenates itself as new businesses and productive processes replace acrchaic ones, was the key insight of Harvard economist Joseph Schumpeter. Government through Keynesian policies however, can completely thwart this process and halt the economic progress of society as a whole. This is exactly what has been going on for years in the most crisis stricken European nations.

Creative destruction has not been allowed to rejuvenate economies as Keynesianism through bailouts and perpetual subsidies have sustained unproductive businesses and workers for years, if not decades.

This meant that when the inevitable downturn finally showed up somewhere, as it always does in an integrated global economy following technological progress and structural changes, it was much prolonged and made harsher by the previous successful attempts to temporarily postpone it.

The problem this time is not a temporary drop in consumer demand, but major structural weaknesses, which has caged Europe’s economic future.

This cage has for the most part been constructed by European governments themselves and comes in the shape of overregulated domestic markets, exorbitant tax rates, uncompetitive wages and inflexible labor markets, which are increasingly incapable of competing with emerging market economies.

Add to the equation that said governments feel the need to practice Keynesianism at every turn of the business cycle, when all the economy is really doing, is restructuring, renewing and improving itself, and you have the perfect recipe for perpetual crisis.

Death by nanny state

The crown jewel in this gargantuan mess is the top-heavy European bureaucratic leviathan and her cradle to grave welfare pyramid scheme.

The latter policy has done the most damage as the Euro-nanny states have created the most resilient entitlement culture and state dependent citizens anywhere in the world since the days of free bread and circus for the citizens of Rome as an overt bribe for not criticizing the transgressions of the state.

What Europe needs is less state, not more. Every Euro spent by the state is a Euro not spent raising productivity by the private sector. Every Euro redistributed in the name of welfare and altruism is a Euro not paid by a private business to a productive economic growth-inducing employee.

When less is more

The private sector drives economic growth. The state lives and feeds off of, as well as impedes, such growth. This law of statecraft has long been forgotten across the old continent where citizens are today having an increasingly hard time coming to terms with the fact that the state has no independent stream of revenue other than the citizens themselves.

Less taxes, less regulations and a smaller state combined with creative destruction and more capitalism is the solution to the European crisis. This is the complete opposite of everything espoused by Chancellor Merkel’s ‘More Europe’ policy.

Before anyone attempts to remind her of that, they’d be wise to remember Upton Sinclair’s dictum, “it’s difficult to get a man to understand something when his job depends on him not understanding it”.

The state has long since replaced religion in Europe as Karl Marx’s opiate of the masses. Therefore expect contemporary Europe to continue sowing the seeds of her own economic destruction, just like more bureaucracy, more state and more Moscow inevitably brought down the Soviet Union.



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