What beliefs, if any, inform European economic policy- makers? Is there a coherent framework that drives fiscal and monetary policy?

Perhaps the answers are best derived from looking at what politicians actually do rather than what they say. In economic policymaking at least actions really do speak louder than words.

Nobody in Europe’s corridors of power believes in fiscal policy as a tool for stabilising the business cycle. This pre-Keyenesian mode of thinking has curious intellectual roots. The main place it is found in academic circles is in Chicago-style faculties, most obviously in what has often been called the “freshwater” school of economics, so-called because of the proximity of the relevant universities to the Great Lakes of Canada and the US.

There are plenty of academics in Europe that share the “freshwater” antipathy towards fiscal activism but, for the most part, they provide little intellectual leadership beyond the mere repackaging of the works of American economists.

The upshot of all of this is that debate is focused entirely on deficit reduction, even in countries such as Germany where there is no obvious public sector debt issue.

Interestingly, there is nothing even in “freshwater” economics that leads us to the crude European fiscalism of today, where the observed behaviour of policymakers reveals a singular belief in the power of smaller budget deficits irrespective of current business cycle positions, irrespective of the current size of the deficit or stock of debt.

Our fiscal policy goals, explicitly stated, are to reduce budget deficits in almost all circumstances. We are, for the most part, living by our fiscal beliefs.

But not if we are French – they play by different, more opaque, rules, ones that defy coherent explanation. In any event they get away with (a) permanent budget deficits and (b) ones that are always allowed to overshoot their targets.

Monetary policy

We seem to have some belief in the power of monetary policy. We have given the ECB the mandate to keep inflation below, but close to, 2 per cent. And that is it.

The idea behind the 2 per cent inflation target is that economies are best left to their own devices. If inflation is stable and slightly positive we should also observe steady real economic growth. There will always be a business cycle but it is pointless to try and do much about this: economies are best left to gently oscillate around their natural growth rates.

Our beliefs are that by always cutting budget deficits and by maintaining low inflation we will deliver the best possible outcome: real economic growth that goes up and down but not by too much.

What trend rate of growth will economies display in this strange world? Can anything be done to influence this potential growth rate?

We may not believe in the power of policy to stabilise, let alone boost, short-term growth but surely there is something to be said for policies that look to raise growth potential?

Some of our more thoughtful policy- makers think along these lines. This is where we hear calls for “structural reforms”. This is shorthand for policies that raise long-term growth rates.

The ECB, for example, is always calling for structural reforms; it is a chorus that usually includes the IMF, OECD and the Central Bank of Ireland.

Structural reforms are always politically difficult. Their benefits are always long-term but the costs are immediate.

They are only ever implemented by politicians brave and decent enough to think beyond the next election. So we hardly ever see them.

But policy really does matter. Currently we don’t do fiscal policy, we have a failed monetary policy and are doing nothing to raise long-term growth rates.

The economist Andrew Smithers this week compared the experience of Ghana and South Korea since 1950. Back then Ghana was 30 per cent bigger than South Korea. Mostly because of superior economic and education policies (and with inferior resource endowments) South Korean per capita incomes are now 12 times higher than those of Ghana. Economic policy matters a lot.

It is to our detriment that we no longer believe this.