Social Democracy, the “Third Way,” and the Crisis of Europe, Part 1

By Alejandro Reuss, a historian, economist, and co-editor of Triple Crisis blog and Dollars & Sense magazine. Originally published at Triple Crisis

This is the first part of a three-part series on the historical trajectory of European social democracy towards the so-called “Third Way”—a turn away from class-struggle politics and a compromise with neoliberal capitalism—and its role in the shaping of the Economic and Monetary Union of the EU. It is a continuation of his earlier series “The Eurozone Crisis: Monetary Union and Fiscal Disunion” (Part 1 and Part 2). His related article “An Historical Perspective on Brexit: Capitalist Internationalism, Reactionary Nationalism, and Socialist Internationalism” is available here.

The idea of a united Europe was not unique to neoliberal politicians or financial capitalists, even if their vision was the one that ended up winning out. Rather, this idea cut across the entire political spectrum, from forces clearly associated with giant capitalist corporations and high finance to those associated with the working-class movement. Just as there have been “anti-Europe” or “euroskeptic” forces on the political left and right, there were also diverse forces in favor of European unification, each with its own vision of what a united Europe could be.

Going back to the mid-20th century, leaders of the social democratic, reformist left envisioned a future “Social Europe.” The European Social Charter, adopted by the Council of Europe in 1961, promulgated a broad vision of “social and economic rights,” including objectives like full employment, reduction of work hours, protection of workers’ rights to organize and bargain collectively, rights to social security and medical assistance, protection of the rights of migrants, and so on.

Figures on the revolutionary left, like the Belgian Marxist economist and Trotskyist leader Ernest Mandel, advocated a “United Socialist States of Europe.” This was an expression not only of revolutionary internationalism, but also of Mandel’s view that the working class could no longer confront increasingly internationalized capital through political action confined to the national level.

In other words, the question was not just whether Europe would become united, but (if it did) what form such unification would take.

Triumph of the “Modernizers”

The vision of social democracy on a grand scale did not come to pass, nor even was there significant movement in that direction when social democratic parties led the governments of the largest and most powerful countries in the EU. During overlapping periods in the late 1990s, the Labour Party’s Tony Blair was prime minister in the U.K., the Socialist Lionel Jospin was prime minister in France (though in “cohabitation” with Conservative president Jacques Chriac), the L’Ulivo (Olive Tree) coalition’s Romano Prodi led the government in Italy, and the Social Democrat Gerhard Schroeder (leading the so-called “Red-Green” coalition, with the Green Party as junior partner) was the chancellor of Germany.

All of these governments were led by figures who had turned away from the traditional social-democratic politics of class struggle (in even the moderated form prevalent in the postwar period), while still promising to temper neoliberal capitalism. This approach became known as the “Third Way,” a term especially associated with the “New Labour” program of Blair in the U.K., but also used to describe similar shifts in other countries. As Swedish political scientist Peo Hansen puts it, Blair expressed “unconditional espousal of capitalist globalization and … further liberalization of labour markets.” Jospin, who campaigned as a critic of neoliberalism, quickly shifted to “multiple privatization schemes and policy reshufflings favourable to business.” Prodi was “firmly in the camp of the ‘modernisers’.”

The case of Germany is especially instructive: The finance minister in the Social Democratic-Green coalition government, Oskar Lafontaine, was notable for swimming against the neoliberal tide—criticizing the EU’s fiscal constraints and inflation-targeting monetary policy, and proposing the adoption of common tax and social welfare policies. That is, he was arguing for EU-wide social democratic reforms to end “race to the bottom” dynamics (on wages, taxes, etc.) emerging in the EU. “Wage dumping, tax dumping and welfare dumping,” Lafontaine declared, “are not our [social democrats’] response to the globalization of markets!” That was too much for Schroeder and other social democratic leaders in Europe, and Lafontaine resigned under pressure in 1999.

Lafontaine would later become a founder and leader of Die Linke (The Left), which is certainly to the left of the Social Democrats. He was not, however, a revolutionary who threatened to upset the reformist apple cart. Rather, argues Hansen, Lafontaine was a “political liability among his own for merely sticking with a set of very traditional social democratic policies and values.”

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  1. lin1

    The Third way movements, so called, used the language of reform, the language of toned-down class struggle to gain power but have never worked toward any of the goals implicit in that language. The opposite is true. Politicians like The Clintons, and Obama in the US, and Blair in the UK, have worked steadily to erode the gains made by workers struggles in the 20th century, and have done far more to that end than any right wing ideologue could have. . There have a been a few bitter lesson for the working class in it 1. Like it or not, there is a class struggle 2. class struggle doesn’t end when you gain a few concessions 3. You cant hire opportunistic politicians to carry on that struggle for you by voting for them once every few years.

    1. Giacomo

      If you want to push a right wing agenda the most effective way is to have it done by parties having a left wing label.

    2. Tim

      It amazes even cynical me how the US “liberal” left does not have the faintest grasp of this.

  2. hemeantwell

    I’ll once again jump in, hands waving, to recommend Wolfgang Streeck’s “Buying Time” and Peter Mair’s “Ruling the Void” to anyone who wants a more developed take on this subject. Streeck is particularly good on how Marxist theorists missed the boat on the possibility of a legitimation crisis of capital from the standpoint of capitalists themselves, as opposed to the standpoint of the working and — I’ll cautiously add — professional-managerial classes. There’s also a useful periodization of the changes in sources of state funding, accompanied by consideration of the politics accompanying those changes. Mair is great on how “catch-all” parties developed out of the more class struggle-oriented parties the article refers to. (It’s a real shame Mair died relatively young.).

    1. John Zelnicker

      @hemeantwell – And I’ll add Bill Mitchell’s recently published book “Eurozone Dystopia – Groupthink and Denial on a Grand Scale”. It traces the development of the Eurozone from the early Franco-German rivalry going back to the 1940’s. Of course it emphasizes the economic mistakes in the creation of the Eurozone, but also has a deep dive into the political issues and errors that led to those mistakes.

  3. Unorthodoxmarxist

    I wrote about this on Counterpunch early last year in relationship to Syriza:

    “This, of course, has always been a fundamental contradiction when left-social democratic parties have swept to power: the political consciousness of its working class base demands a direct attack on the inequities and injustices of capitalism but not to the extent of overthrowing capitalism itself. Social democracy is thus philosophically idealist about fundamentally altering the dynamics of capitalism while ignoring that those reforms will never change capitalism’s core dynamic of class rule and exploitation, but it will cloak this under the rubric of pragmatism and the endless possibility of voting in a bourgeois electoral system. In an era of expanding worldwide demand and growth of industry in the core, the social democratic system of working class empowerment could be tolerated as it tamed the wilder impulses of the working class while creating the consumers now lauded as the “middle class” of 20th century capitalism’s 30-year golden age in the post-WWII era. Social democracy never won the working class political control, but the power wielded by socialist parties allowed segments of the working class access an increasing share of capital’s immense accumulation in the post-war era.

    Syriza has arrived on the scene decades after the last meaningful acts of social-democracy could occur. Capitalism in the core has long since ceased to need to make deals with socialist parties as representatives of an industrial proletariat; those jobs have been replaced by shifting industrial work to the periphery as the capitalist world-system tends to do specifically as acounter to the success of mid-century social-democracy, or by increasing mechanization in the core – again, a tendency within capitalism well described by Marx. Straitjacketed by a capitalism that no longer needs to tame a restless proletariat into a large consumer class, Syriza faces immense pressure from “the institutions” to allow continued profiteering from privatization and bond repayment – the very things that constitute super-profit in the financial era of this end of capitalism’s long-cycle. Add to this the European Union’s structure itself, which was built to constrain any national attempts at left-reformism, and Syriza’s determination not to even bluff about a Grexit – which might provide a modicum of control over at least the nation’s currency and deficit spending – and there is little room for a party like Syriza to deliver on its promises.”

  4. Sound of the Suburbs

    Neo-Liberalism is dying a natural death.

    It was all about the private sector and the successful pure capitalist model.

    Have you heard a policy maker expect the private sector to do much in the last eight years since 2008?
    No, it’s all been about national institutions.
    Central Banks for monetary policy and Governments for fiscal policy.
    The private sector is interested in easy profits and not the potential losses when the going get tough.

    The IMF and others now realise there is a problem with global aggregate demand (due to inequality).
    The current suggestions are helicopter money, fiscal stimulus and redistribution through taxation.
    Pure capitalism polarises personal wealth, destroying demand.

    This week in the FT, Larry Summers was talking about the problems of the disappearing middle class in the US (the polarisation of personal wealth).
    Middle class consumption made a significant contribution to GDP and as it disappears GDP is affected.

    Neo-Liberalism destroys itself.

    The expansion of globalisation is complete.

    The maintenance of consumption with debt has reached the end of the road.
    The polarisation of personal wealth has impoverished the global consumer and is killing demand.

    There is too much money at the top leading to negative yield on many investments.
    With such subdued demand there is little to invest in.

    Supply never did create its own demand – someone just made it up.

    Central bankers have to throw in trillions to keep this failing system in the permanent stagnation of the “New Normal”.

    It’s dying.

    1. Tim

      Oh I don’t know, does it destroy itself, or is it fulfilling a purpose in converting republics into oligarchies?

  5. Gromeri

    What should come next: Collectivization. Workers uniting to form their own worker-owned enterprises. Imagine an employee-owned Uber etc. Its the only way out for the masses. To make automation work for us, end exclusion & stop this race to the bottom.

    1. digi_owl

      And that, in the end, is what Marx was also suggesting. Not the mess Lenin and Stalin produced in Russia. Heck, Marx basically denounced Lenin’s ideas as idiotic.

    2. jrs

      maybe, worker owned firms are still going to face problems caused by competing (with capitalist or even solely with other worker owned firms). This competition fosters cutting corners (on the environment, on other ethical issues etc.). So there are still problems.

  6. Sound of the Suburbs

    Neo-liberal capitalism is in crisis and no one seems to know how to move on from today’s “Secular Stagnation”.

    Capitalism is in crisis for a very good reason.

    Today’s ideal is small state, raw capitalism, which is actually how capitalism started, and we chose to ignore the work of the Classical Economists that studied it first hand in the past.

    They realised capitalism has two sides the productive side, where “earned” income is generated and the unproductive, parasitic, rentier side where “unearned” income is generated.

    Today’s neoclassical economics is missing this distinction and everyone is going for the easy money in the unproductive side of capitalism.

    The UK now dreams of giving up work and living off the “unearned” income from a BTL portfolio, extracting the “earned” income of generation rent.

    The UK dream is to be like the idle rich, rentier, living off “unearned” income and doing nothing productive.

    Adam Smith:

    “The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

    Capitalism incorporates a welfare state for the idle rich and we can see our Aristocracy living in luxury and leisure off the “unearned increment” today.

    In our ignorance of the reality of small state, raw capitalism, we have been busy promoting the unproductive side of capitalism to the masses by encouraging the BTL investor.

    When you encourage too many people into the unproductive side of capitalism they are going to bleed it dry.

    Adam Smith would think we are on the road to ruin:

    “But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.”

    Exactly the opposite of today’s thinking, what does he mean?

    When rates of profit are high, capitalism is cannibalising itself by:
    1) Not engaging in long term investment for the future
    2) Paying insufficient wages to maintain demand for its products and services

    In the 18th Century they would have understood today’s problems with growth and demand.

    Having forgotten the work of the Classical Economists, we set today’s goal as maximising profit which actually undermines and eventually destroys capitalism itself.

    Amazon didn’t pay out profits as dividends and re-invested them, look how big it’s grown.

    Just imagine if all companies were doing that.

    We have undermined, and are destroying capitalism itself, because we didn’t understand it.

    Small state, raw capitalism existed before and we should have taken on board the lessons the economists learnt at the time when they studied it.

    1. Sound of the Suburbs

      The Classical Economists always expected the bankers to get behind the productive side of capitalism.

      Everyone has now forgotten the two sides of capitalism and about 80% of lending goes into real estate, inflating the cost of living with high mortgage payments and rent.

      This in turn raises the cost of living and the minimum wage, making Western labour uncompetitive in international markets. It also reduces the purchasing power within the economy, reducing demand for products and services.

      All known and seen over two hundred years ago in the first round of small state, raw capitalism.

      (In those days it was just high rents, but the effect is the same).

  7. likbez

    Sound of the Suburbs,

    Thank you for your posts. They are greatly appreciated. It reminds me 2011 discussions about political sustainability of neoliberalism in Crooked Timber (cited via Economist):
    == quote ==
    OVER at the Crooked Timber blog, Henry Farrell comments on Doug Henwood’s response to Matthew Yglesias’ argument for a higher, employment-boosting inflation target, which I endorsed in my last post. Mr Henwood dislikes Mr Yglesias’ apparent “neoliberal” preference for monetary over fiscal remedies to high unemployment. He writes:

    From an elite point of view, the primary problem with a jobs program—and with employment-boosting infrastructure projects—is that they would put a floor under employment, making workers more confident and less likely to do what the boss says, and less dependent on private employers for a paycheck. It would increase the power of labor relative to capital.

    I think we’re supposed to understand “elite” as roughly synonymous with “neoliberal” here. “Neoliberalism” has become something of a term of abuse on the left, though its denotation remains vague. It is something of which Mr Yglesias and I, despite our considerable ideological differences, are regularly accused. This newspaper is even denounced from time to time as a neoliberal rag. Anyway, as a sort of neoliberal (a neoclassical liberal), let me say that from my point of view the problem with jobs programmes, as compared to textbook monetary policy, is not that they increase the power of labour relative to capital. It’s that they do little to sustainably increase demand for labour. And nothing reduces the power of labour relative to capital more than low demand for labour. But I digress.

    Mr Farrell notes that Mr Yglesias is a better leftist than Mr Henwood gives him credit for, but thinks Mr Henwood is “on to something significant” in his complaints about Yglesian left-leaning neoliberalism.

    Neo-liberals tend to favor a combination of market mechanisms and technocratic solutions to solve social problems. But these kinds of solutions tend to discount politics – and in particular political collective action, which requires strong collective actors such as trade unions. This means that vaguely-leftish versions of neo-liberalism often have weak theories of politics, and in particular of the politics of collective action. I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital).

    They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case. Even if left-leaning neo-liberals are right to claim that technocratic solutions and market mechanisms can work to relieve disparities etc, it’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics.

    The implied premise here seems to be that labour-union social democracy is an ideology that generates self-sustaining politics. But Mr Yglesias pops up in the comments to say:

    [T]he self-assurance that there’s some non-neoliberal miracle formula for political sustainability seems refuted by the fact that the pre-neoliberal paradigm in the United States was not, in fact, politically sustainable.

    == end of quote ==
    My impression that neoliberalism can continue to exist in the current zombie state (when ideology is completely discredited, but power of multinationals is still in full swing and there are no viable alternatives other then returning to a modernized variant of the New Deal) until the real “peak/plato oil” crisis hits the civilization. That might be several decades away.

    Communism as an ideology was dead probably soon after WWII but managed to survive in zombie state for another 40 years.

    Trump and, especially, Sanders both signal that the backlash against neoliberal globalization is mounting in the USA, but whether Trump can outrun “status quo” candidate Hillary remains to be seen. The power of neoliberal media and neoliberal brainwashing might yet be way too strong for staging “another Brexit”.

    One possibility is that neoliberal elite might resort to unleashing another world war to solve the existing problems. Hillary in this sense is a real unmitigated danger.

  8. RBHoughton

    For a socially responsible version of economics, compatible with caring humane society, a copy of M’Cullough’s “Economics” or any of Henry George’s old books is advantageous.

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