In American political discourse “European” is used as shorthand for socialism, a pervasive anti-market mentality, and an extensive welfare state. Like most simplifications this stereotype is only part true, as the European policy reaction to the Great Recession has a striking libertarian flavor.
The Economist magazine remarked that there are two competing explanations for the continuing economic malaise:
- Aggregate demand was weakened with the collapse of housing prices and has not yet returned to normal levels
- Overinvestment in housing caused permanent damage to the economy that has no easy fix. Time is needed for resources to be channeled to other uses before economic growth will continue and unemployment will fall
Between these two competing explanations, the second one is clearly more libertarian. The first explanation suggests that government can return the economy to normal by boosting aggregate demand through large increases in spending. This is the policy path that American officials favor while pundits on the left like Paul Krugman berate them for not taking it far enough.
In contrast the second explanation suggests that aggressive government action will be ineffective at restoring growth and employment to normal. At best government spending projects can treat the symptoms of the recession by offering temporary work and assistance. In addition to offering the more laissez faire policy prescriptions, the second explanation recommends itself to libertarians by tracing its genesis to the traditionally libertarian Austrian school of economics.
European policy makers are firmly lined up behind the second explanation. Not only do they eschew large stimulus bills, they are perfectly willing to cut public programs to cover up budget holes caused by lavish spending in boom times and anemic tax receipts.
America has the reputation of the hardcore market fundamentalist of the world. But it is nominally socialist Europe that is trusting the market to heal itself while the American government eagerly takes on ever more debt for emergency programs. In a few years it is not hard to imagine Europe roaring out of the recession with a firm financial footing while the American recovery is dragged down by its own debt crisis.