Fifteen years ago there would have been an immediate confident mainstream answer. The United States was then celebrated for its flexible labor markets, while Europe was said to suffer from rigidity, known as Eurosclerosis. In a 1999 paper that has been cited over 2,000 times, economists Olivier Blanchard and Justin Wolfers argued that these differences of "institutions" conditioned the responses of the two regions to "external shocks." Thus the US, with more flexible institutions, would rebound from an event like the Great Financial Crisis, while Europe would be expected to linger in stagnation.

Twelve years after Germany's Hartz reforms (a set of reforms designed to make Germany's labor market more flexible - the ed.), this explanation cannot hold. There is today a large low-wage sector in Germany. Inequality, which was once very low, has risen. There is enormous pressure on unemployed workers to take whatever jobs may be offered. Labor markets are therefore far more flexible than they were. No one can argue - though I suppose some may try - that the recent enactment of a loophole-ridden minimum wage has restored the power of German labor. And yet, it is Germany that is dragging the Eurozone down.

Europe's economy today makes nonsense of claims that "structural reform" is the key to growth. Structural reform has been tried throughout Europe; it has produced growth nowhere. Granted, the enactments often fall short of the promises; but then each shortfall and each failure to show results sparks a call for more reforms - the true mark of a fanatic. The governments that continue to comply do so cynically: in Greece to escape (unsuccessfully, so far) from the bailout; in Italy to strengthen Mr. Renzi's EU negotiating stance. Very few in the countries stricken by structural reforms delude themselves into thinking they will work.

Good for the US, bad for Europe

A better place to start is the price of energy, which has been low in the US and much higher in Europe. This is partly due to the different costs of natural gas, much more to different rates of tax. In a word, Europeans are pricing in the social costs of climate change, Americans are not. That is good for growth in the United States, bad for growth in Europe. For anyone who thinks that the markets reward virtue and punish vice, this is a most telling counter-example.

Today's falling price of oil is boosting domestic purchasing power and therefore growth in the United States; whether it will do the same in Europe depends on the reaction of households, who may spend more on other goods, or less if they expect continuing deflation. Either way, the effect is at the expense of high-cost energy producers. In the US, some shale drillers will retrench or fail, and on both continents the competitiveness of renewable energy will be challenged. For anyone who thinks that cheap oil is an unmixed blessing, the climate costs of this sudden development bear reflection.

James K. Galbraith

A second key difference lies in competitive exposure to China. The United States buys from China; Germany (above all in Europe) sells to China. So a Chinese slow-down has little effect on the US, except via the channel of lower world resource costs, which is in America's favor. But China's internal slowdown leaves high-end German machinery industries without the major growing market on which they had hoped to rely. Perhaps that will stimulate useful attention to the merits of new public investment - of a "Green New Deal" in Europe. Given the feeble proposals of EU Commission President Jean-Claude Juncker in this area so far, such attention is needed.

Institutional differences

Another key difference lies in institutions, public and financial. Despite the American reputation for having a weak welfare state, social insurance in the United States worked effectively in the crisis, sustaining incomes at the bottom of the wage-and-incomes ladder in the face of major shocks. As a result of these "automatic stabilizers," the US was able to run very large public budget deficits and so to repair (over time) the balance sheets of the household sector. In Europe, this prop to total demand worked in the rich countries but it was cut away by austerity in the crisis countries, and the balance sheets of both households and of sovereign debtors got worse. The crisis countries are small, for the most part, so their effect on the whole Eurozone is not large. But it exists, and in those countries the conditions are catastrophic.

Finally, after years of quiet living, to a degree the American banks have now returned to their old tricks. Where before there were sub-prime mortgages, today there are sub-prime car loans and other credit delights, including massively rising student debt, which cannot be discharged in bankruptcy. These new debts have helped to buoy the American economy - for now. The risk of a later collapse, when the defaults start rolling in, is apparent, but - as always - regulators find reasons to fail to intervene in time.

Europe, be bold!

In short, the US is experiencing growth based mainly on lower energy prices, rising private debts and an elastic public deficit - confirming Bismarck's alleged remark that God protects fools, drunks and the United States of America.

Meanwhile Germany and Europe suffer a slowdown rooted in weaker exports, more conservative banking practice and fiscal cutbacks. Europe is quite right to keep energy prices high and to have more conservative banks. But this finding does confirm that if Europe wants growth - even slow growth - it has to change policies. Public fiscal austerity is the failed policy that should give way.

In particular, Europe must find a way to implement new policies of reconstruction and investment at the continental scale - including new efforts to combat climate change - and new policies of solidarity and income support for Europe's most threatened and vulnerable people, especially in the crisis countries. Especially if the whole world now gets a breathing spell from the choke-chain of rising energy costs, that would be the best way for Europe to deploy the dividend.

James K. Galbraith is Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin. He is the author of "The End of Normal: The Great Crisis and the Future of Growth."