Conventional wisdom says we must avoid recessions at all costs. This is a fatal mistake, argues Gunther Schnabl, named one of Germany’s most influential economists by the Frankfurter Allgemeine Zeitung. By using government stimulus to put failing firms on life support, states are trapping capital in “zombie” companies and strangling creative newcomers. Europe in particular is now paying the price for a paralyzing fear of recession. Only a dose of “creative destruction”—as seen in Javier Milei’s Argentina—can save it.

1. Keynes reloaded

For decades, economic policy in the advanced economies has been guided by a seemingly self-evident objective: recessions must be prevented at all costs. Whenever a crisis hit, growth slowed down or other threats emerged, central banks and governments intervened with monetary easing, fiscal stimulus and regulatory expansion.

The intellectual foundation of modern crisis-prevention is rooted in John Maynard Keynes’ idea of policy response to the Great Depression of the 1930s. Faced with mass unemployment, collapsing demand and deflation, he recommended deficit-financed government spending, as human beings seemed too shortsighted and emotional to cope with the crisis. Rising public debt was seen as the temporary cost of macroeconomic stabilization.

What was once meant to be temporary became permanent. In Europe Keir Starmer, Emmanuel Macron and Friedrich Merz continue to fight anemic growth with debt-financed government expenditure, supported by new interest rate cuts of the Bank of England and the European Central Bank since 2024. Yet, why are the European leaders so unsuccessful in their attempts to fight stagnation, while the disruptive US president Donald Trump hails his success in keeping up US growth dynamics?

2. Short-term gain, long-term pain

In the short term, central bank-financed government spending works well. When a financial crisis hits, interest rate cuts and asset purchases by central banks can stabilize financial markets in a timely and effective manner. US Federal Reserve Chairman Alan Greenspan earned a reputation as a wizard of financial markets by decisively lowering interest rates in the face of financial crises. European Central Bank President Mario Draghi received the German Federal Cross of Merit for saving the euro at the height of the European debt crisis. As a byproduct of government bond purchases of central banks, governments could issue more debt, create additional demand and subsidize corporations to reduce unemployment.

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The suppression of recessions has led to a paradox, previously observed in socialist planned economies: stability without dynamism.

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Over the medium term, persistently low interest rates and growing central bank balance sheets distort price signals on financial markets, triggering fast-rising asset prices. The resulting financial exuberance was—again and again—the preliminary step of bursting bubbles, which made even larger monetary and fiscal stabilization measures necessary. Widened scope for spending encouraged governments to create ever more ambitious goals of policymaking, with regulation used as an additional tool. Climate protection became a justification to sustain low interest rates and to continue debt-financed government expenditure.

In the long term, persistently low interest rates and proliferating subsidies reduce the pressure on corporations to increase efficiency and bring forward innovation. In the advanced economies, an increasing number of so-called zombie corporations became dependent on the support of governments and central banks. Proliferating regulation and bureaucracy increasingly restricted innovation capacity and tilted private economic activity into social and green directions predefined by governments. Fast-rising government expenditure allowed employment relationships in the public sector with a good work-life balance to grow rapidly. Government expenditure, unprecedentedly high for peacetime, and debt levels have created persistent pressure on central banks to keep interest rates low.

3. The impact on society