Unemployment has risen steadily during the last five years in all of the major European economies. Although there have been some signs that the rate of increase may have slackened this is mainly due to the fiscal-led expansion in the United States. Recent evidence suggests that the growth rate in the United States is slackening, and the need to reduce the structural budget deficit means that the rest of the developed countries can no longer rely on the United States as the main source of demand growth in the world economy. In spite of this, European governments have been reluctant to undertake fiscal and monetary policy actions which might sustain the recovery. In part this reflects a pessimism about the efficacy of conventional stabilisation policies born of the experience of the mid-seventies. However, the current situation is arguably very different now. Whereas the recession of the mid-seventies was largely the result of a supply-side shock requiring a downward adjustment in real wages, the recession of the early eighties is largely a consequence of the contractionary fiscal and monetary policies pursued outside the United States. That the present high levels of unemployment are Keynesian rather than Classical in nature has been argued forcefully by e.g. Dornbusch et al. (1983) and Bruno (1985). A reversal of these contractionary policies could therefore be expected to increase employment. Thus Layard et al. (1984) have argued there is scope for a temporary, supply-side friendly, fiscal expansion concentrated in public investment, subsidies to private investment and measures to reduce the marginal cost of employment. This would be accompanied by a modest relaxation of monetary policy to prevent real interest rates rising. Because such an expansion would be temporary it need have no long-run implications for inflation or real interest rates.