Steve Keen: Growth must come from within first

Steve Keen: “Growth must come from within first”

By Hans-Peter Roll

[This article posted on June 3, 2025 is translated from the German on
the Internet, https://makroskop.eu/20-2025/steve-keen-wachstum-muss-zuerst-im-inland-entstehen/.]

Friedrich Merz will not pull Germany out of the crisis, believes
Australian economist Steve Keen.

Shortly before the end of the old legislative period and before the
start of his own chancellorship, Friedrich Merz pushed through a
special fund for infrastructure – 500 billion euros are to be
invested. In addition, the debt brake will be lifted for defense
spending if it exceeds one percent of GDP. At the same time, the new
chancellor has been a staunch advocate of “more capitalism” for years:
privatization, deregulation, and attracting foreign capital. But these
recipes will not pull Germany out of the crisis, says Australian
economist Steve Keen.

Professor Keen, what do you think about people from the financial
elite taking top political positions? Can they be trusted?

Put simply, you can trust them not to know what they are doing. Take
the issue of foreign investment, for example. All industrialized
countries are trying to attract foreign capital. But where is this
capital supposed to come from?

All these countries are trying to stimulate investment with money from
outside, while at the same time arguing that their governments have
run up too much debt and that the government deficit must therefore be
reduced. What they are basically doing is eliminating one of the two
sources of money creation. Banks create money by lending more than
they get back in repayments. Governments create money by spending more
than they collect in taxes. If you stop the latter, all that remains
is credit-based money creation. This already accounts for the lion's
share of money creation today, but if you eliminate government money
creation, you remove a significant dynamic from the economic cycle.
The result is low growth.

Most economists in Germany would argue that excessive government debt
reduces growth.

If you look at the history of how money creation was abolished by the
state – a side effect of the takeover of economic policy by
neoclassical economists 40 or 50 years ago – you can see that the
promises made in the 1970s that "abolish government regulation,
abolish budget deficits, and we will have high growth rates." The
opposite has happened: in the US, annual economic growth averaged well
over 4 percent between 1950 and 1975. Since then, it has been well
below 3 percent. They have significantly reduced growth. This clearly
shows that you did not and do not know what you are doing. And that is
precisely what is so dangerous.

In other words, we should be worried about Friedrich Merz?

Many of the people who have studied economics and whom Merz obviously
listens to believe what they have been taught – a completely false
picture of how capitalism really works. When this flawed model is put
into practice, it hinders growth rather than promoting it. And that in
turn undermines the welfare state, because it is the first thing to be
cut when growth stagnates or the debt ratio becomes too high according
to neoclassical standards. This causes everything to shift further to
the right—a self-reinforcing process that began in the 1970s and
continues to this day.

Back to courted foreign capital: Are there any other effects of
foreign investment?

In principle, one should try to build up the economy on one's own –
and not hope that foreigners will do it for you.

That alone is problematic. But there is more: if foreign investors act
rationally, they want to get more money out than they have invested.
They may build factories that would not otherwise exist, but the
profits flow back abroad. Local workers are paid wages and
subcontractors may enjoy some benefits, but ultimately this increases
the outflow from the domestic economy because profits are repatriated.

“It is naive to believe that foreign investment is the basis for growth.”

It is naive to believe that foreign investment is the basis for
growth. Growth must first come from within, through domestic money
creation and innovation. And this is where Germany has fallen far
behind, just like Japan. Just a few decades ago, German automotive
engineering was considered world-leading. The same was true of
Japanese technology. However, both countries experienced enormous
private debt bubbles – the Japanese one was far more extreme. After
that, there was hardly any investment – and they fell behind
technologically.

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So if you want to promote growth, you have to rely primarily on
domestic forces. This is particularly true when it comes to money
creation: foreigners often bring their own financing with them – in
the past, for example, when the Deutschmark was still in circulation,
foreign investors did not bring Deutschmarks with them, but dollars,
which had to be converted into Deutschmarks. So what happens? Money
creation has been completely outsourced. The same could have been
achieved through domestic lending or government spending. It is a
mistake to believe that foreign capital is necessary to kick-start
this process.

The new federal government has repeatedly expressed the need for
private investment in public infrastructure. What is your view on
privatization?

To be honest, I don't think much of it. There is a long list of
negative examples. One that particularly sticks in my mind comes from
Australia. An old friend of mine worked in Paul Keating's ministry and
later wrote a book called “Water's Fall” – a play on words that can
mean both ‘waterfall’ and “the decline of water.”

One of the examples was the privatization of the sewage system in
South Australia, later dubbed “the great stink.” After privatization,
the maintenance of the bacterial treatment plants was neglected by a
private company. These plants were used to biologically break down
fecal matter. However, the sewage treatment tanks were located
downwind from Adelaide.

This meant that every morning in Adelaide, you could wake up to the
unmistakable smell of sewage. This situation continued for several
years until the problem was finally resolved. This clearly illustrates
what happens when essential infrastructure is left to private profit
motives. The state, on the other hand, when responsible for
maintenance, can allocate funds for this in the long term without
worrying too much about profit or loss.

One of the main problems here is that private operators – especially
those with a venture capital mentality – try to generate returns from
public goods. One way to do this is to cut back on long-term
maintenance. In the short term, this increases management bonuses,
shareholders are happy, and managers can retire. But two or three
successors later, everything collapses. This is exactly what we are
currently experiencing—because in the UK, for example, the great wave
of privatization began around 40 years ago.

What should a new German economic model look like? Where should the focus be?

If you want to survive in a capitalist economy, you have to constantly
improve your own technology—that is essential. If you don't, you have
a problem. In this respect, the entire structure of the euro—the
Maastricht Agreement, the rules of the ECB, national finance
ministries without a real central bank—has hampered economic
development. These rules essentially prevent the creation of money by
the state. And without this, there is a lack of consumption and
economic activity in general. Entrepreneurs cannot imagine generating
enough cash flow to develop new products. Instead of taking out loans
that leave them with debt and interest payments, many are choosing to
stay put. And that means less innovation instead of more.

“The Maastricht Treaties were supposed to promote growth – in fact,
the opposite has happened.”

Whatever Germany – or any other eurozone country – tries to do is
being held back by this crazy monetary system. And it's been going on
for 25 years now. If you look at what we were promised when the euro
was introduced, it was said that it would promote innovation and
enable economic growth. In fact, we already had the single market,
which enabled German car manufacturers to sell vehicles in the
Netherlands or France – that drove growth. But with the euro, the
ability of individual governments to create money was restricted.

The result is a sluggish, sclerotic monetary system that stifles
innovation in our own countries. The fact that Europe is complaining
about a lack of innovation today is a symptom of failure. The
Maastricht Treaties were supposed to promote growth – in fact, the
opposite has happened.

So you think the euro is the problem?

I have never been a fan of the euro – and never will be. The economic
structures and cultural differences between countries such as Germany,
Italy, France, Greece, Croatia, and Belgium are simply too great for a
common currency. And now they even want to extend it to countries such
as Romania.

The problem here is that Germany traditionally has a low inflation
rate, while Italy, for example, has a high one. In the past, such
differences could be offset by exchange rate adjustments, but that is
no longer possible today. A system that allows for exchange rate
adjustments would be absolutely crucial to getting out of the dilemma
Europe has found itself in since the global financial crisis.

The only time Europe did reasonably well economically was when private
debt was simply ignored. There were private debt bubbles which, as
everywhere else, burst in 2007. After that, the economy slowed down.

“Many people appreciate the euro because they no longer have to
exchange money when traveling – but that is an emotional advantage,
not an economic one.”

In the long term, I therefore see no solution other than a return to
national currencies. Politically, this will not happen – but
economically, it would be necessary. The better solution would have
been to keep national currencies from the outset and use the euro only
as an international trading currency. The central banks could have
joined forces and said: “We will enable conversion at zero cost.”
Instead of private providers jumping into this demand gap, an
agreement could have been reached between the European central banks:
mark against lira at the respective market value – but without losses
for those involved. Today, for example, I use a Wise card for most of
my transactions. It supports multiple currencies and performs
conversions at almost no cost. That is exactly how it should have been
done with the euro from the outset.

Instead, the euro destroyed the basis of economic control: a
functioning monetary and fiscal policy. Many people appreciate the
euro because they no longer have to exchange money when traveling—but
that is an emotional advantage, not an economic one. And economically,
the euro has caused massive damage. Countries that keep their own
currency will be more innovative and successful than those that have
given up their monetary sovereignty.

Nevertheless, as you yourself say, abandoning the euro is illusory at
present. What concrete economic policy measures could Germany take
instead?

Germany needs an industrial policy. Specific areas must be promoted in
a targeted manner – and if you look around the world, you can
immediately see which topics dominate and which first movers have a
head start in areas such as artificial intelligence and
electromobility – Germany is lagging far behind here.

Beyond that, there are a number of highly developed technologies—for
example, in energy production—where Germany should strive to play a
leading role. This will not happen automatically—it requires a
coordinated effort between the state and the private sector.

Even conservative politicians are on board when it comes to promoting
investment, as this is considered to be growth-promoting—and the debt
can be repaid later. Consumption promotion – for example through
social spending – often meets with resistance even in progressive
circles because it is considered short-term and unsustainable. At the
same time, spending on things like teaching positions is formally
considered consumptive – even though functioning schools would be
unthinkable without it. Isn't this focus on investment too one-sided?

Of course there are differences between investment and consumption –
but they are interdependent. If you want growth, you need investment,
that's clear. But this must also lead to consumption. There is no
point in producing things that no one can buy. Investment without
consumption leads to warehouses full of unsold products.

The same applies to government spending: what is the point of building
schools if there are no teachers? That is pure idiocy. You cannot say:
we will finance investment, but not running costs. Then you end up
with buildings without staff – absurd.

“The state must do both: invest and consume.”

The state must do both: invest and consume – which also means
financing pensions, healthcare, etc. Social spending is often
dismissed as an unnecessary luxury. But what happens if you let
pensioners starve or abandon the elderly? You risk poverty and social
upheaval – and that has political consequences.

I used to do physical work, but today I can't even close my fist
because of my arthritis. If I had remained a craftsman, I would no
longer be able to work. What would be left? A life of poverty, perhaps
becoming politically radical. That is exactly what is happening right
now: people feel abandoned and are turning to right-wing parties. The
state must provide for those who can no longer work. That is the only
way a society can function.

Read also:

Steve Keen: “I expect a ‘climate Minsky moment.’”

Hans-Peter Roll | January 16, 2025

Hans-Peter Roll studied philosophy and economics in Bayreuth and
Freiburg. He is particularly interested in political economy and
heterodox economic theories. He has been a research assistant at
MAKROSKOP since early 2022.