Jon Bloomfield European Crisis and the Silence of Social Democracy

This is John Bloomfield's talk given to the Leeds Taking Soundings January 26th 2012 on 'The European Crisis and the Silence of Social Democracy'.

For the last eighteen months Europe has been the epi-centre of economic attention. The world’s largest single market has proved unable to tackle an initial little local difficulty in Greece, one of its smallest economies. The institutions of the EU and its senior politicians have dithered as the crisis has snowballed. As the people of Greece have resisted and protests have spread to Spain and elsewhere, the political response has always been slow, confused and mired in monetarist orthodoxy. Within all the drama one voice has been noticeably absent: that of the mainstream European Left. Social democracy has been silent. Tonight I try to answer the question, why? And then to suggest what can be done about it and why it is important.

Why?

In the UK, Labour’s leadership came to terms with membership of the EEC after the 1975 referendum. But it was only when, in 1988, the French Christian-socialist president of the European Commission, Jacques Delors, persuaded the TUC of the potential of a European ‘social dialogue’ – against a backdrop of the Thatcherite offensive against the labour movement in the UK – that the party’s trade union base came around.

However, this pro-European trend weakened enormously during the Blair–Brown era. Blair’s ‘third way’ was neither a variant of orthodox social democracy nor a new right-wing version of it – it was a complete break. That is why solidly right-wing social democrats like the former deputy Labour leader Roy Hattersley and leading French figures such as Pascal Lamy were so opposed to it. In his autobiography, the late Robin Cook reports on an exchange at a meeting of the Party of European Socialists in October 2002 between Lamy, formerly French finance minister and currently head of the World Trade Organization, and Peter Mandelson, the architect of New Labour and then European commissioner for trade. Lamy was explaining the key dilemma that he saw facing social democracy. ‘Historically, the success of social democracy in the past century was to promote a compromise between labour and capital, between the state and the market and between commercial competition and social solidarity. Globalisation has unhinged the balance by taking away all the domestic levers by which we maintained the compromise,’ he said. Mandelson responded: ‘Globalisation offers all the best the world can offer. We must not sound as if we believe there is a tension between labour and capital, or competition and solidarity.’ To which Lamy in turn replied: ‘Yes, but that is what I believe.’[i]
There in a nutshell is the gap between social democracy and ‘New’ Labour’s Panglossian alternative. It explains ‘New’ Labour’s opposition to intervention in any form.

The Blairites had considerable success in promoting this thinking within other social democratic European parties. At the end of the 1990s thirteen of the then fifteen members of the EU had governments of the Left. Many of these bought wholesale into the Clinton Third Way. They were deceived by the easy, early fruits of globalisation arising from the computer revolution and the sudden opening of the ex-socialist economies of China, Russia and Eastern Europe to world markets.

Some, such as the Spanish and Portuguese socialists, the Italian Left as well as the German SPD, also accepted the neo-classical orthodoxies of the Maastricht Treaty and the European Central Bank (ECB) as they embarked on the single currency project. The treaty of 1992 entrenched neo-liberalism. Framing the completed market in capital, labour, goods and services, monetary union was established on the German model, with an independent bank committed only to low inflation – not, as with the US Federal Reserve, a responsibility for high employment. Euro members were (theoretically, as it turned out) to be restricted to budget deficits of 3 per cent of GDP and debt–GDP ratios of 60 per cent. Yet the EU’s budgets – known in the jargon as their ‘own resources’ - were to remain negligible, thus providing no significant fiscal capacity to deal with the risk of asymmetric shocks to individual economies. It was, quite simply, pre-Keynesian.

Most of the Left, traumatised by the defeats of 1980s and the impact of the ICT revolution, offered no critique. An already weak grasp of economics, spread wider; the vast majority of the Left did not understand what was going on with the creation of the Single European Market; the financialisation of capital following on from the Big Bang and credit default swaps;, with booming house prices and asset bubbles. Generally speaking, each national Left focused on a range of other issues, ignoring the overall big economic picture. They fell for the post-modernist myth that ‘grand’ narratives belonged to the past. Well, as we now see, there is a big story here – and the Left missed it.

The financial crisis of 2008 blew this ‘third way’ apart. It revealed the limitations of this approach.
Firstly, this model of financial, de-regulated globalisation was unstable – I use a gentle, polite word. It did not end ‘boom and bust.’ In fact, it needed the massive intervention of the state, “big government” – to save it from the disasters of its own making.
Secondly, it promoted ever larger inequalities. This was something that again most of the Left across Europe ignored, above all New Labour. Working class and middle incomes in the USA have not risen over the past 40 years. In the UK they have been increasingly squeezed with living standards being maintained by the increased participation of women in the labour market and home-owners using the equity of their homes. As Jeffrey Sachs, former monetary hawk; architect of post-Soviet economic reforms; and adviser to George Osborne prior to 2010 general election.
acknowledged in a Newsnight interview last summer.
“Globalisation has meant a massive rise in income inequalities. The rich have walked off with the prize. We need to get more serious about the crisis facing our society. The rich have become fantastically rich and need to be taxed more.” When did you last here a top-flight Centre-Left political leader say something similar?

Thirdly, the world did not follow the neo-conservative dream of American hegemony but instead was becoming increasingly multi-polar. Indeed, I would argue that the invasion of Iraq designed to confirm and exalt American power in fact revealed its limitation and accelerated its decline. And the economic crisis has confirmed and accelerated these trends. The G7 has become the G20 and the North Atlantic domination of the world economy has gone forever.

Fourthly, to exert any control on this turbo-capitalism, it has become increasingly clear that you have to be big. The EU’s Single Market which with enlargement from Central and Eastern Europe had grown to 500 million people has the potential to be a player in this globalised economy, in a way that European countries acting on their own cannot. Labour just does not get this: – the Conservatives even more so. Listen to them, it is as if all the major issues faced by UK citizens can be addressed entirely in a domestic context. It is not true to say that globalisation has entirely removed the role of the ‘nation state’. The well-run Nordic universal welfare states, which supposedly imposed far too costly a tax ‘burden’ to survive in an era of globalisation, have come out of the crisis in very good fiscal order – quite unlike those Anglo-American states whose poor ‘fiscal effort’ has left their exchequers sinking in red ink after the property busts.
Yet globalisation, and now the many-faceted global crisis which has issued from it, has meant that the agenda of twenty-first-century progressive politics in developed countries cannot be dealt with by medium-sized countries acting on their own. Both transnational corporations and global financial markets have become more powerful than individual states. The macro-economic levers national governments previously applied – fiscal and monetary policy – have become less effective,[ii] as was all too evident when François Mitterand essayed a go-it-alone reflation in France in the early 1980s.

To recover, social democrats need to remember that their role is to manage and regulate the market, not to glorify it. Labour and its ‘third way’ European followers got the economics of modern capitalism wrong. Yet in the discussion that has followed the 2010 election defeat, leading Blairites are blithely ignoring this gaping hole at the heart of their project.[iii]

Similarly, the European political and financial establishment has shown a complete inability to address the crisis. Instead it has blithely continued with its previous monetarist orthodoxies. As the asymmetric impact struck Greece, Ireland and Portugal in turn, European leaders, far from agreeing the required transformations for the eurozone as a whole, pursued a series of ad hoc bail-outs, which failed to punish the bankers who had created the crisis, socialised their risks to the taxpayer and enforced a deflationary dynamic which could only make the austerity policies self-defeating.

The severe dangers of the orthodoxy of the European Central Bank, the European Commission and the German political leadership are becoming increasingly apparent. The bail-out conditions imposed on Greek, Irish and Portuguese citizens show how brutal these measures are, as do the austerity measures demanded of the Spanish and Italian governments. But to date the main alternatives presented have been nationalistic ones, notably withdrawal from the euro. Yet there is a powerful case for a progressive alternative, which is now beginning to surface.[iv] This requires an active macro-economic policy that breaks from the orthodoxy and the mantra of ‘structural reform’.

European social democracy has not yet grasped these realities, which mean that markets must be controlled and their regulation can only be done at a European level. Throughout the 20th century social democrats across Europe had won concessions at national level for workers and citizens. It was here that they forced compromises on business and secured social gains on pensions, wages, health and welfare provisions. It was a settlement that mainstream Christian Democracy accepted after World War Two. Globalisation has broken that hinge economically, while Thatcherism and neo-liberalism more generally have led the political assault. Currently, across Europe, they have turned a crisis caused by reckless financial globalisation into a crisis of government revenues and demanded a policy of austerity. The European Left has stood open-mouthed and paralysed in response.

What are the options?

1. The first which has been basically followed by the Spanish, Portuguese and Greek Left in government is to accept the neo-liberal story and pursue an austerity course. The consequences are dramatic: social democratic governments confront both the weakest sections of the population and their own supporters with predictable electoral consequences. Here and elsewhere the acquiescence of the Left to monetarist orthodoxy opens up political space for the xenophobic right.

2. The second option is to argue that the game is up for Europe and to accept in the words of Guardian commentator Martin Kettle that “the nationalist right and the global bond markets have won. The internationalist social and Christian democrats have lost.” (Guardian 23 June 2011). That defeatism is pervasive in Labour’s ranks – Blue Labour as well as New Labour.
New Labour and now In the Black Labour basically reverts to the first option. They want an orthodox, monetarist policy, a pale blue version of Osborne and Cameron. Blue Labour dangerously flirts with the nationalist option, a socially conservative, inward-looking Left focussed on England. Left-wing MP Jon Cruddas talks of “a conservative socialism”, “an English socialism that believes in family life.” It is completely unspecified but on reading these articles you get the strong sense that Melanie Philipps will know what he means! Soundings editor Jonathan Rutherford puts it like this. “Labour’s historic task is to organise to conserve the good in society…to defend it when it is threatened by the market and the state and to nurture it back into existence….Labour’s future will be conservative because the decade ahead requires a reparative politics of the local…” [1]
I’ll just say briefly, appealing to the most reactionary and backward elements in the population is no place for the Left. Neither is believing that in today’s world you can insulate ‘the local’ from the wider economy. And that is before Maurice Glasman incendiary remarks on immigration. Let’s be clear:you can’t have a UKIP of the Left.

An Alternative of Green growth and employment

3. Neither option makes sense for social democracy. Instead it should do what it has traditionally attempted: adapt to new terrain and come up with realistic programmes for social advance. On both the economy and the environment that means thinking and organising at the European level. The core story is fairly clear.
Firstly, the Left should state clearly that the priority for Europe is economic growth, more particularly green growth, not austerity. (Even the ratings agency Standard and Poor’s is now arguing for this, as when it downgraded France, Austria and 7 other EU countries on Friday 13th January) That means rejecting the orthodoxies of Maastricht, the ECB and the Bundesbank. Instead there should be an immediate cut in ECB interest rates and active intervention to weaken the euro against other currencies.

Interestingly, over the last few months, both developments have begun to happen. The new head of the ECB Mario Draghi has twice reduced ECB interest rates by a quarter of a per cent; while the on-going policy weakness of the Euro has led to its weakening in the exchange markets. The ‘strong’ euro policy of the ECB penalises all the weaker economies of southern Europe making their exports much more expensive and meeting the conditions of EU and IMF loans all the harder. Up till now, the European Central Bank was the only central bank in the world that refused to limit the appreciation of its currency. Purchasing power parities mean that one euro should trade at around 1.18 to the dollar and 4.67 to the yuan. In summer 2011, it traded at over 1.45 to the dollar and 9.20 to the yuan. The euro has weakened significantly since then. A move to all –round competitive devaluations would be dangerous for the world economy but some rebalancing between the major economies is in order. More important is to boost aggregate domestic demand.

Secondly, it should support a range of measures which Europeanise the debt problem. Former Prime Ministers Amato and Verhofstadt have proposed a transfer of Maastricht-compliant debt of up to 60 per cent of national gross domestic product to a Union debit account that is not traded. Its interest rates thereby would be decided on a low and long-term basis by Eurozone finance ministers rather than rating agencies. This would strengthen governments and curb the speculators.

Thirdly, the ECB should issue Eurobonds, drawing on the basic economic strength of the European currency. This would attract funds from the central banks of the emerging economies and sovereign wealth funds and should be used for an extensive programme of green investments.

Fourthly, the Left should strongly back the Commission’s proposal for a financial transactions -’Tobin’-tax both to rein in financial speculation and to raise significant revenues for new European-wide initiatives. The European Commission estimates that this would raise €55 billion per year – roughly half the EU’s annual budget. This could be allocated to a range of green growth programmes across the EU and beyond, for example major solar energy investment programmes across North Africa.

None of this is rocket science. Neither does it require any change to EU treaties. This is absolutely the last thing that anyone should contemplate now. Remember the last Treaty changes. Eight years of contemplation and the main result was the creation of a new leader for Europe, the President of the Council of Ministers. How many here can name him? What difference has he made?
What is urgently required is a coherent challenge to the monetarist mantras of the German financial establishment and the ECB. So far it has been left to economists like Joseph Stiglitz, Paul Krugman and Stuart Holland to suggest alternatives. If social democracy wants to offer Europe-wide solutions, it urgently needs to get its act together. Francois Hollande is well positioned to challenge Sarkozy in France. The SPD-Green alliance is regularly winning regional elections in Germany. Ed Miliband has signalled his break from Blair and predatory capitalism. When are they going to meet up and thrash out a common programme to meet Europe’s crisis?

These measures will however require a dramatic political and cultural change, within but also way beyond the forces of the left. It means that the German, Italian and Spanish left will have to break from the orthodoxies that they have accepted in the past – just as Ed Miliband and Ed Balls have to make much clearer where today’s Labour differs from ‘New’ Labour, especially on the banks. A common European economic perspective on the steps required should be a priority. But alone this will not be enough. It will require deft political footwork across the normal political divides to get this shift. But without it the European economy will continue to drift and there will be increasing nationalist resentment at the imposition of austerity by EU institutions, which can only spell danger for progressives across Europe.

Don’t kid yourself that the UK will somehow be immune from the fall-out or that the disastrous economic consequences won’t have profound knock-on social effects. The rise of fascist parties in Holland, Austria and Hungary and of xenophobic and racist parties in Italy, Denmark, and above all France should serve as a warning as to what is at stake. Nasty nationalism is on the rise across Europe. We got a flavour of it with the populist response to Cameron’s so-called use of the veto at the last EU summit. Furthermore, we now see the stirrings of a new German nationalism. Volker Ruhe, the number two in the CDU arousing German nationalism at his party congress was a warning. For decades the mantra has been that we want to develop a European Germany as the alternative to a German Europe. Ruhe’s rabble-rousing speech was a signal that this could easily change. If everywhere plays to their own narrowly-conceived national interest and plays the national card, then Germany will too. As the country is now re-united, and is Europe’s most populated and economically strongest power, they will win.

The Left needs to remind itself of the lessons of the 1930s. We need to offer an alternative to austerity and unemployment and unite all progressives around those limited goals or else we shall lose out badly to the hard Right and the far Right. There are broad alliances to be won on these questions. But we need to present clear and straightforward policy alternatives. And, we need to recognise that if we want to control and regulate the forces that are shaping our economic future, then we have to operate at a European scale. Socialism in one country is long gone; Keynesianism in one country died with the Mitterand government in the early 1980s. A growth strategy across Europe is the only progressive game in town. And it is about time progressives from across the broadest spectrum began to argue for it.


Jon Bloomfield is co-author with Robin Wilson of ‘Building The Good Society: A New Form of Progressive Politics. (Compass)
http://www.compassonline.org.uk/publications/item.asp?d=5767



[1] Ibid. Rutherford pp.58 and 63.
[i] Quoted in Robin Cook, Point of Departure: Diaries from the Front Bench (London: Pocket Books, 2004), 226
[ii] Panić, 162
[iii] See David Miliband, ‘Why is the European left losing elections?, speech at the London School of Economics, 8 March 2011 (www2.lse.ac.uk/publicEvents/events/2011/20110308t1830vOT.aspx)
[iv] Paul Krugman, ‘Can Europe be saved?’, New York Times, 12 January 2011 (www.nytimes.com/2011/01/16/magazine/16Europe-t.html?_r=1); ‘Zone euro: le remède va-t-il tuer le malade?’, Le Monde Dossier Economie, 5 April 2011 (http://lemonde-emploi.blog.lemonde.fr/2011/04/05/zone-euro-le-remede-va-t-il-tuer-le-malade-dans-%C2%AB-le-monde-economie-%C2%BB/); John Grahl, ‘Crisis in the eurozone’, Soundings 47 (spring 2011), 143–58