The Keynesians and the Monetarists have battled it out throughout the economic slowdown and recession of the last seven years, without a clear winner. Roughly speaking the Keynesian economists (i.e. the left-leaning economists) have argued that through increased government  spending the vicious circle of recession, redundancy and debt will be broken by high employment, high personal and business spending, and high tax revenues. By contrast the Monetarists have argued that you don’t solve a debt crisis by creating more debt. Whereas the UK took the latter approach and France the former, both their economies were roughly the same size in 2007, and are roughly the same size now (although the UK’s slump was deeper than France’s, while its recent growth rate rather more sprightly).

Moderating the instincts of countries to incur excessive debt the European Union has its Stability and Growth pact. While largely ignored by everyone over the years, in principle it still stands that EU economies should aim to get their budget deficits below 3% of GDP and their national debts below 60% of GDP. It is a sobering fact that after seven years of “austerity” we still see an EU whose 28 countries (as of the first quarter of 2014) have an overall budget deficit of -2.5% (the deficit figure for Q4 2013 was -3.2%), which is to say that on the whole the governments of the EU are spending 2.5% more than they are taking in tax revenues.

The deficit figure for the 18 countries of the eurozone was actually -4.1% (a significant worsening from the figure of -2.0% for Q4 2013). The point is that after a seeming eternity of belt tightening, the EU is still not actually paying down its debts. Indeed, again for Q1 2014, the level of EU28 government debt was 88.0%, and the figure for the eurozone was an even more elevated 93.9%, both of which figures are significantly above the target of 60% of GDP.

Clearly there are a diversity of economies within the EU, from Estonia, whose gross government debt is an economical 10% of GDP, all the way up to Greece whose debt is an unaffordable 174.1%. Similarly the EU ranges from thrifty Latvia with a budget surplus of 2.5%, to extravagent Croatia with a budget deficit of -9.9%.

While most people are increasingly exhausted with austerity, after years of stagnant wage growth and high levels of unemployment, yearning for a return to the past, the figures above clearly indicate, far from austerity Europe is still not quite living within its means. It is true that as unemployment goes down (as it now thankfully is) social security payments will reduce while the government’s tax take will increase, meaning that the cyclical deficit will reduce improving the EU’s overall deficit figures. But will this be enough in the longer term?

The EU is not alone in this regard since the US is facing its own budget deficit troubles. With a current level of national debt that for quarter 1 of 2014 was $17.6 trillion, or 104% of GDP, America’s debt levels are high. Obviously it helps that you have your own currency that the rest of the World uses. The Congressional Budget Office (a non-partisan US federal agency responsible for providing budget and economic information to congress) in July of 2014 issued its Long-term Budget Outlook report which anticipates federal spending exceeding federal revenues for the foreseeable future, for a number of reasons not least of all the cost of the US’s major healthcare programmes, its social security, and the cost of paying the interest on the debt.

It is clear that for the USA and the EU, austerity is the new norm (perhaps it should have been the old norm as well), with ageing populations, robust social security systems, and expensive healthcare programmes governments across the EU are going to have to find more revenue, or savings, with which to pay down their inflated deficits while also meeting their existing obligations to the economy.

To say the least this is a challenging task. Europe is limping out of its recession, yet there are already major risk factors on the horizon, including the potential of escalating conflict in with Russia in eastern Ukraine. Sanctions against Russia, while right and proper, will hurt the West, and it may be that Russia will take the opportunity to try and turn off the lights in Europe over winter by manufacturing a gas payment dispute with Ukraine and then turning off the taps. Europe is planning to diversify its sources of energy, but it is not there yet and, until then, anything that impacts on the energy supply will impact on economic growth

If each generation has its own challenge, then it is clear that the struggle that Europe currently faces is one of battling debt. Many finance ministers crafted golden rules by which to be guided, where they would not borrow across the economic cycle, meaning that, basically, like the diligent housekeeper they would save during the boom years and then spend across the bust years. Across the boom-bust cycle spending would be balanced by saving making this approach responsible and fiscally neutral.

However get this wrong, instead spend during the good times, and you are left attempting to borrow to fund Keynesian reflation when your nation is already heavily indebted. Fiscal responsibility is rather complicated by the political cycle not being synchronised with the economic one. Politicians have manifesto promises they want to fulfil and probably need to spend to fulfil them. They only have four years until the next election, which they may not win, consequently, in the absence of any pressing external imperative (i.e. a financial crisis), the democratic pressure is for political parties to spend when they can.

While not all countries in the EU are at the same point in their economic cycles it is clear that across the political spectrum there is now an enhanced understanding of the importance of long-term fiscal responsibility. While after seven years of low growth and austerity, this may not be the best news in the world, we have now entered a prolonged period when governments need to focus more on balancing budgets, and living within their means, and less on making unfunded spending promises. The challenge then becomes on delivering growth and low unemployment in an environment where government spending is constrained.