Europe’s Economy Needs an Intellectual Revolution

Two months ago, I reported on how poorly the European economy performed in 2025 and on the consequences of that poor performance:

A stagnant economy is not just a problem for academics and number crunchers at the government’s treasury. It is a problem with great consequence for working families whose career opportunities erode as unemployment creeps up; for entrepreneurs whose small businesses find their markets squeezed by stagnant consumer spending; and for politicians who struggle to balance the government budget.

At the risk of kicking a dead horse, as the American saying goes, I nevertheless want to return to this problem. No major problem of any substance in the EU will get solved so long as Europe’s economy is sinking into stagnation and industrial poverty. There will be no defense build-up without new growth to generate the necessary tax revenue; there will be no renovation of Europe’s decaying energy system unless the economy is expanding. 

Health care, education, economic security for families and the elderly—they all need the proceeds from a growing economy. By the same token, they all suffer under the increasingly rationed fiscal regime that is born from economic stagnation. 

The simple fact is that Europe should make its economic quagmire its top public policy priority. Instead, its leaders seem more concerned with stifling free speech than building a path back to economic growth and prosperity. 

To be fair, all is not lost on the economic front. There are faint but hope-inspiring signs of situational awareness among European policymakers. Back in February, ECB president Christine Lagarde gave a speech in Washington where, in a convoluted but still audible way, she actually admitted that the European economy is in trouble. 

In early March, the EU Commission took a step further by recognizing that Europe’s manufacturing industry is in bad shape. Predictably, though, they resorted to what I called a “ham-fisted approach to industrial policy”: any revival of industrial Europe, their report says, will have to be spearheaded by government—or else not happen at all. 

Herein lies the very core of Europe’s economic malfunction. Every elected or bureaucratic post of any consequence for economic policy seems to be occupied by the same mindset: government needs to be at the center of the economy. This is not surprising: the entire construct of the European Union was predicated on a grand master plan for how the union was going to run Europe’s economy. In a nutshell, it consisted of three policy tools, each of which was assigned to achieve one specific economic goal:

1. Prudent fiscal policy was going to generate economic growth. With the member states held responsible for their budget balancing, the EU Commission could enforce the Stability and Growth Pact and its limits on government debt and deficit rates (60% and 3% of GDP, respectively).
2. Monetary conservatism on behalf of the ECB would guarantee price stability.
3. Full employment would be the result of labor-law harmonization between the member states, in other words, a shared responsibility between the member states and the EU. 

This economic-policy master plan never worked. The reason is simple: the real-world economy does not function as the plan assumed it does. For starters, the mechanism by which fiscal policy would generate economic growth—a balanced government budget—relies on the premise that budget balancing lowers interest rates. 

There is no evidence that fiscal austerity lowers interest rates, nor is there any credible evidence that low interest rates lead to economic growth. In fact, the strongest growth period in the U.S. economy over the past half century was in the 1990s, when interest rates were the highest they have been since the stagflation era of the late 1970s.

While monetary policy is well suited for keeping inflation in check, the ECB has not used its monetary policy for that purpose for most of its existence. It abandoned its price stability goal gradually in the 2000s, threw it out completely in the 2010s, and did not return to fighting inflation until after 2021, when pandemic-driven monetized government spending had caused the highest inflation rates in decades.

As for the labor market instrument toward full employment, neither economic theory nor real-world statistics offer the slightest support for its functionality. In reality, fluctuations between employment and unemployment are normal in a well-working economy. They are driven more by traditional swings in the business cycle than anything else. Long term, employment as a share of the total population increases if a government reduces the generosity of its welfare state, cuts taxes, and removes regulatory hurdles to workforce participation and entrepreneurship. 

To all this, we must add the ‘economic stagnation mechanics’ that are embedded in the euro zone. I explained these in my recent review of the euro ambitions of Hungary’s incoming government: the only way that the ECB, aided by the EU Commission, can hold the currency union together over time is to force all member states to implement perennial fiscal austerity. This fiscal regime depresses economic activity and thereby, so to speak, reinforces economic stagnation.

In other words, the architects of the European Union got the whole picture wrong. Not only did they assign problem-solving responsibilities to entities—primarily the EU Commission and member state governments—that could not solve them, but they assigned policy tools to the solution of problems for which those tools were particularly ill suited. Europe is now living with the fallout of this failed structure.

Europe needs a radically new economic architecture. It should have few elements, none of which should be alien to anyone who remembers the birth of the EU itself: the four freedoms of movement across national borders. Back in the early 1990s, the EU was portrayed as the great facilitator of European integration—a means to a fully integrated economy. While many believed that the EU would first and foremost facilitate the free mobility of labor, capital, goods, and services, those who created the EU structure actually built a political machine fueled by one overarching lie: government is the driving force of the economy.

Only an ordered retreat from the economy by the big, ham-fisted government can let Europe’s consumers, workers, entrepreneurs, and investors create the dynamism, creativity, and optimism from which prosperity emerges. Although laissez-faire is an often misused term, its original meaning still stands: trust that when entrepreneurs and investors do what is best for them, they do what is best for all of us.