Experts, soothsayers and pundits have been falling over themselves to list the factors that combined to produce the worst economic downturn since the Great Depression. (My ha’penny’s worth is here). A partial consensus has emerged on some issues (excessive deregulation of the financial sector, current account imbalances) while debate continues to rage on others (such as the role played by central banks, China, and growing inequality).

But it’s instructive to think for a moment about the factors that are generally, albeit implicitly, agreed not to have caused the crisis. Of course at one level, this might seem a trivial exercise: there is an infinite number. But consider the following selective list of non-culprits: rigid labour markets, out-of-control budget deficits, over-generous welfare states, powerful trade unions, too rapid growth of wages and excessive equality.

Sound familiar? Right, these are the things that, for about a quarter century now, a seemingly invincible phalanx of international institutions, national governments of the right and increasingly also centre-left, media pundits – oh, and I almost forgot, investment-bank chief economists – has assured us are the causes of high unemployment and slow growth. They are the usual suspects.

European economies have now suffered an unprecedented contraction of output. While forecasts are getting more optimistic a sluggish recovery is almost certainly the best that can be hoped for. Unemployment will in any case return to double-digits – way beyond the level when the Lisbon process was inaugurated in 2000 – and on past experience will be slow to fall. And the five sets of key explanatory factors, drummed into policymakers for years, the intellectual underpinning of one reform program after another, explain… nothing. The usual suspects are innocent.

Instead the rise in unemployment is primarily due – in a nutshell – to failings in two main areas: first, a naïve reliance on market forces and excessive deregulation of the financial sector; and second, linked to that, the failure of macroeconomic policy to prevent bubbles and imbalances arising and then to arrest the downturn when they burst. Yet none of the major debates and policy initiatives on employment and unemployment of recent years – the OECD Jobs Strategy, the European Employment Strategy, the Lisbon process – had taken seriously issues of demand management and the need to stabilise economies in the face of speculation and asset booms and busts. This, in turn, reflected a cast-iron faith in the theories that claimed that monetary policy could and should only ever target inflation, discretionary fiscal policy had no role in stabilisation, and deregulated (financial) markets could never get prices wrong.

The crisis has blown these theories away. Much of the policy agenda of the past decades has evidently been tangential at best and harmful at worst. Yet it is vital to make the implicit recognition of these facts explicit. For it is not at all clear that – beyond some limited re-regulation of the financial sector – the needed, more far-reaching changes in our economic and employment policies will materialise. There is a real risk that, in a situation of large fiscal deficits and high unemployment, the old, now discredited medicine will once again be prescribed, as happened after the recession of the early 1990s (which by the way also had primarily macroeconomic causes). This will be the locus for key political debates and struggles in Europe the coming month and years.

Future columns will examine the different policy fields mentioned and the controversies surrounding them. Together they will set out the case for a different approach to maintaining sustainable growth and high employment, one that is more coordinated, more social and more European.

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