London: You’ve got to hand it to the Chicago school of monetarists. From what seemed like almost certain defeat 30 years ago, they are back in business.

In the 1980s, there was the failure of the British chancellor (finance minister) Geoffrey Howe’s first two budgets, only rescued by a jumble sale of under-invested state assets and ultra-low commodity prices. In the 1990s, they championed faster and purer markets, unencumbered by regulation. They claimed every area of economic life could be virtually self-regulating, especially exotic financial products.

After the financial crash, precipitated largely by this flawed theory, instead of slinking away, they had another solution.

Now austerity has run into the ground two years after its adoption (largely by the rightwing governments of Europe). Again no apology, just a pitstop for refuelling and a new proposal.

Growth built on cuts in workers’ terms and conditions: obviously this is not a new idea for monetarists. But it has been given a special place in speeches by Europe’s remaining rightwing leaderships in the past two weeks. We can give you growth, said Germany’s foreign secretary Guido Westerwelle on Friday, but not at the expense of government spending cuts, not in Germany or Greece or Spain. It must involve supply-side reforms, he said, which is generally a monetarist euphemism for reduced labour rights. (And monopolistic practices, though in truth with a focus on cabbies and chemists more than big companies and the professions.)

Westerwelle, leading representative in Angela Merkel’s coalition of the free market FDP, said Brussels should also better target its existing subsidies, and tear down more barriers to free trade.

In Britain it is the same story. The Treasury said the government’s legislative programme contained measures to promote growth. Yet the only bill recognisably designed to support business is one that helps firms more easily fire staff.

In this way, rightwing elites besotted with monetarist ideas continue to hold sway, zigging and zagging to keep control of the debate.

It is alarming how easily monetarist ideas have prevailed. Without much competition from left-leaning thinktanks, monetarists have convinced working people they are the reformers and that social democrat parties are a barrier to recovery. Social democrats only seek to preserve the privileges and outmoded practices that got us into trouble, they argue.

Privately, or in small gatherings, they admit to flaws in their design for global capitalism based on an absence of regulation, but deny it provided the unstable foundations to the boom years. Monetarists maintain it was the profligacy of social democratic-style governments that was really to blame.

There is no need to repeat the facts and figures that show this is a ridiculous argument. Suffice it to say that virtually all the government’s extra borrowing in the past four years replaces missing taxes from property, personal incomes and corporate profits while at the same time paying more in benefits (and that is without including the billions of pounds lost in bank bailouts).

The crime committed by Gordon Brown, Hank Paulson in the US and finance ministers across Europe of all political colours was to believe in the low regulation story and watch, with regulators at their side, as banks went on a lending spree.

Westerwelle and his colleague, finance minister Wolfgang Schauble, are two of the most dangerous characters in European politics, along with the British chancellor, George Osborne, for their adherence to the bankrupt idea that Europe cannot compete globally without cuts in real wages, benefits and working conditions.

While there are outmoded practices and crazy spending policies in different countries, attacking the living standards of ordinary workers is not going to produce the confidence we need for growth.

Many hope France’s Socialist president-elect, Francois Hollande, will undermine the dominance of monetarist policies.

Hollande has promised to try to renegotiate the pace of public spending cuts, rightly believing that only with a boost in state spending will the private sector regain confidence. This fact goes to the heart of any critique of supply-side economics.

We can only leave the private sector to regenerate an economy if we have first let asset prices be destroyed. There is a myth that private businesses, in the main, take risks. Mainstream businesses, and especially those that are publicly owned, must be more circumspect. Banks ignored the rule because they enjoyed the protection of huge implicit state subsidies.

Business owners will buy land, factories and shops only at recession-hit, knockdown prices before shifting up a gear, increasing investment and employing people. Only with the cushion provided by artificially low asset prices will these nervous creatures take their first expansionary steps.

This is the first postwar recession where asset prices have been supported by the Bank of England. Without its quantitative easing programme, house prices and land prices would have repeated the 50 per cent-plus falls of the 1990s. Instead, homes fell 10 per cent to 15 per cent and have since recovered by half, according to the Land Registry.

In this environment, where asset prices remain high and banks, private or publicly owned, are weighed down by toxic debt, everyone will sit on their hands. Only collective action by citizens, which is what governments are, can make up for the restrictions placed on the private sector by shareholders.

Westerwelle thinks of the Greeks much as Henry II perceived Thomas Becket: troublesome and better off out of the picture. But only because he denies basic economic truths for the southern European countries his government effectively controls. Without a route out of disaster — a cheap currency, a robust banking system ready to lend or booming export markets — they will crash. The only comfort is the FDP’s low poll ratings. With elections next year, perhaps all Hollande needs to do is bide his time.

By arrangement with the Guardian