Europe’s Supply-Side Revolution

Looking beyond the latest headlines about Greece’s debt crisis, the long-term question for the European Union is: Can it grow? The conventional answer is that it’s too sclerotic, too socialist, too indebted. Not so.

Germany is the largest economy in Europe, and it’s been the first to recover and the best-performing developed economy since the start of the Great Recession. Since bottoming in 2009’s first quarter, German output has grown at an annual rate of 2.8%, compared with 2.4% for the U.S. 

This is the blessing of the euro, not its curse. The common currency prevents politicians from fantasizing that they can devalue—and inflate—their way to prosperity. Instead, as Italy’s new prime minister, Mario Monti, put it, growth “will have to come from structural reforms or supply-side measures.

The transformation of Europe is being made possible—as serious reform is everywhere and always—by crisis. For all the strikes and protests and backlash. Europe seems to know now that its tax-spend-borrow-and-protect social democratic past cannot be its future. Donald L. Luskin 

Mr. Luskin is chief investment officer and Mr. Roche Kelly is chief Europe strategist at Trend Macrolytics LLC.