The Empirical Case Against the Euro
Steve Keen is an Australian economist and author. A post-Keynesian, he criticizes neoclassical economics as inconsistent, unscientific and empirically unsupported.
Cross-posted from Steve Keen’s Building a New Economics
There are many factors that have led to the current winter of discontent in Europe. These include Europe’s lack of domestic energy sources, and the impact of siding with America in its never-ending conflict with Russia. I’m putting these aside, to focus on two key factors that this student revolt could actually change: European economic policy, and the Euro itself.
To put it simply, Neoliberalism is a bad idea, and the Euro is a bad system. The French riots, in response to yet more cuts to government funding of education, may be the force which finally ends both an economic philosophy which has failed the test of time, and an economic system which should have never been created in the first place.
Realistic empirical and logical analysis leads to several heretical conclusions about how to end Europe’s decline. It will take many words and many posts to put the full argument I need to make, but to summarise my conclusions, they are:
That the Euro should be abolished, and all European countries should return to their pre-Euro national currencies;
That, contrary to conventional wisdom and the rules of the Eurozone, responsible governments should run deficits, because that is how fiat-money is created;
These deficits should fund the construction of the infrastructure that a modem society needs, which includes providing a quality education for all students; and finally,
While Neoliberalism and the Maastricht treaty demonise government debt. private debt is the main cause of economic crises, and that is what should be kept under strict limits, whereas conventional economic policy has let it explode.
In this post, I’ll focus upon the empirical data which shows that Neoliberalism and the Euro have been economic failures. In my next post, I’ll explain how the economic theory behind Neoliberalism is based on numerous logical fallacies.
The Empirical Lies of the Euro
Neoliberalism is the belief that the private sector does almost everything better than the government, and therefore that market mechanisms should be used in preference to administrative systems in almost all cases.
I’ve heard plenty of people argue that Neoliberalism itself is a myth—a concept dreamed up by economic radicals to undermine good government, and so on. Often the best way to defend a bad idea is to claim that it doesn’t even exist in the first place, so how can you oppose it? So, let’s go with the Encyclopaedia Brittanica’s definition of Neoliberalism, which is as follows:
Neoliberalism is a political and economic ideology that prioritizes free-market capitalism, private enterprise, limited government intervention in the economy, deregulation, privatization, free trade, and individual economic freedom. It holds that competitive markets allocate resources more efficiently than state planning and that sustained economic growth is a primary path to human progress.
These beliefs are commonplace amongst politicians, and they are promoted all the time by the mainstream media. So, Neoliberalism definitely exists.
Its intellectual foundation is known as Neoclassical economics. This economic theory is believed by almost all politicians and journalists, and most people as well, even if they have never formally studied economics. Its meme is the “Supply and Demand” diagram. This diagram asserts that, in the absence of government intervention, the market will reach an equilibrium which maximizes utility at minimum cost. Any intervention by the government will drive the system away from this equilibrium, and make the social outcome worse. Therefore, for society to function well, government must be constrained, while the private sector should be unleashed.
Figure 1: Supply and Demand. In the absence of government intervention, the market reaches equilibrium
This is where the Euro comes in. A major objective of the Euro system was to put Neoliberalism into practice by making it almost impossible for the State to do anything.
Government spending was limited by the rules of the “Stability and Growth Pact”—otherwise known as the “Maastricht Treaty”. Governments than joined the Eurozone were required to keep government deficits below 3% of GDP, and to limit government debt to no more than 60% of GDP.
To join the Eurozone, countries also gave up their own currencies, so they could no longer have independent exchange rates.
They also gave up independent monetary policy. Before the Euro, Germany could have a different interest rate to Greece. After the Euro, there was one official interest rate for the entire Eurozone.
Finally, Eurozone states even gave up political control of politics. In every other democracy on the planet, politicians are the ones who put proposed new laws before Parliament. But in the European Parliament, the politicians do not draft laws: the European Commission does that. All politicians can do is to debate, and perhaps amend, laws drafted by the bureaucrats in the European Commission.
The logic behind this procedure is that the bureaucrats in the European Commission can be expected to have been trained in economic theory, whereas politics might throw up candidates who had not been so trained. So, don’t let the politicians draft laws: leave those to the economic experts instead. The Eurozone was designed to get democracy out of the way of conventional economic thought.
The designers of this system thought that it would lead to both stability and prosperity for Europe—hence the title of the “Stability and Growth Pact”. But in practice, they delivered neither. This is obvious when you look at the empirical data of the last 25 years.
I’ll start with the facts on the level of government spending in France.
Since the creation of the Euro, the French budget deficit has averaged 4.3% of GDP. It is currently over 6%, when, according to the rules of the Eurozone, it is not supposed to exceed 3%. To try to reduce the deficit to conform to these rules, the French government has slashed its social expenditure, including its spending on education. This is what triggered the student riots.
Students report that they have to endure classrooms without teachers, school buildings wearing down with inadequate maintenance, science classes that are cancelled because of a lack of equipment and raw materials, and many other ignominies. They have had enough, and rightly so.
At the same time, given its support for Zionism, the French Government is expanding military expenditure, which all European governments treat as sacrosanct. No politician has ever asked, “where’s the money going to come from?” when it comes weapons of war. But the same question justifies letting school buildings decay, and letting lessons go untaught, because not exceeding the 3% deficit limit is more important than educating French children.
These bizarre government priorities are the product of an economic system which has failed the test of time. Neoliberal economic policies, and the Euro itself, were supposed to bring stability and growth to Europe. They have delivered the exact opposite.
Europe can claim to have price stability now, in stark contrast to the 1970s, when Italian and French inflation rates were in double-digits, and they were far higher than Germany’s. But that inflationary convergence predates the Euro, which formally commenced electronically in 1999 (with the currency commencing in 2002). In December 1998, the month before the Euro commenced, France had a lower inflation rate that Germany, both countries were on the verge of deflation, and even Italy had a lower inflation rate than the target Central Banks aspire to these days, of 2% per annum (see Figure 1). The main reasons for the fall in the inflation rate were the fall in oil prices after the huge rises during the 1970s, and the growth of China as a manufacturing powerhouse, which reduced the cost of many manufactured goods.
So, though Europe does now have stability in terms of prices, in comparison to what happened before the Euro, this stability has nothing to do with the Stability and Growth Pact itself.
Figure 2: European inflation rates fell and harmonized before the Euro started
In terms of its second objective of economic growth, The Maastricht Treaty has been an abject failure, as World Bank data on per capita economic growth confirms (see Figure 2).
Figure 3: France’s per capita growth rate is 1/3rd what it was before the Euro
There is clearly a downward secular trend to France’s rate of economic growth. But all the same, the Stability and Growth Pact, which was intended to reverse this trend, has, if anything accelerated it. France’s average per capita growth rate before the Euro was 2.9% per annum. After the Euro, it has fallen by almost two thirds, to 1% per annum.
France has also never met the debt rule. The lowest level of French government debt since the Euro was created was 62% of GDP in 2001. It is currently almost twice the maximum level, at 118% of GDP (see Figure 3).
Figure 4: French government debt looks dangerously high in isolation
This might sound dangerous in isolation. But Figure 4 shows the same data in comparison to the level of French private debt.
Figure 5: France’s private debt level is far higher than its government debt level
Why do you never hear about the level of French private debt, when it is almost 100% of GDP higher than public debt? Why do economists and politicians demonize the smaller one, and ignore the larger one? Why do they turn Heaven into Hell to restrain the growth of government debt, while ignoring the rate of growth of private debt, which on average has been twice as high as the rate of growth of government debt since the start of the Euro (see Figure 5)?
Figure 6: The average growth rate of private debt is twice as high as the government debt growth rate
Meanwhile, China is running government deficits which, on average, are 50% higher than France’s, and twice the Maastricht treaty’s limit. China’s government deficit is currently twice as large as France’s (see Figure 6).
Figure 7: China’s average government deficit ratio is 1.5 times as high as France’s, and is currently 4 times the Maastricht Treaty’s limit
These Chinese deficits are not leading to the economic crises that European politicians foresaw.
The conventional wisdom, taught by economic textbooks, is that government deficits reduce the rate of economic growth. This is how Mankiw’s influential Macroeconomics textbook puts it.
a budget deficit … crowds out investment; the resulting reduction in the capital stock is part of the burden of the national debt on future generations. (p. 253)
Figure 8: The standard Neoclassical argument that government deficits slow down the rate of economic growth
Budget deficits, economists assert, reduce private investment, and hence reduce the rate of economic growth. If so, then why is China growing so much faster than France?
China truly gives the lie to this conventional wisdom. Its average rate of per capita economic growth since 1999 has been eight times what France has achieved. This rate of growth means that it would take France seven decades to double per capita income, whereas China has been doubling per capita income every decade. And whereas the benefits of growth have gone overwhelmingly to the wealthy in the West, all social classes in China have shared to some extent in the rapid growth of national prosperity.
China’s rate of growth has predictably slowed down as it approaches the level of income of a developed economy, but its relative outperformance is now even higher: France’s per capita growth rate in 2025 was 0.6% p.a., while China’s was 5.1%. So, China’s admittedly slowing rate of economic growth is now almost nine times France’s (see Figure 8).
Figure 9: China’s per capita growth rate is eight times France’s
Paradoxically, given its belief that budget deficits reduce the rate of economic growth, the conventional wisdom also claims that higher rates of government money creation will lead to higher rates of inflation.
China shows that is also a fallacy. China’s average inflation rate since 2000 was only slightly higher than France’s, while both are below the 2% target that Central Banks set. Since Covid (dating it from 2020), China’s inflation rate has averaged under 1% per year, while France’s has been 2.4%, despite—or perhaps because of?—China’s government deficit being far higher than China’s across this time (see Figure 9).
Figure 10: China’s average inflation rate is below 2% on average, and half France’s current inflation rate
If the empirical data is so strongly in China’s favour, why haven’t European politicians given up on their policies, and copied China instead?
Here, economic theory raises its deceptively pretty head.
The true foundation of these policies is mainstream “Neoclassical” economics, and European politicians cling to them because economic theory tells them their policies are better than China’s—even though the evidence begs to differ.
The basis of the errors of European economic policy is thus Western economic theory. Though economists will claim that their theories are scientific, this is a lie. Neoclassical economics is based on numerous lies, and these riots are showing what happens when economic policies are based upon intellectual lies.
I’ll cover these lies, and how they’re hiding in plain sight in the academic literature, in the next post in this series.
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