European Social Democracy and the Roots of the Eurozone Crisis

Part 2: The Rise of the Third Way

(Click here for Pt. 1: Monetary Union and Fiscal Disunion.)

By Alejandro Reuss | November/December 2016

This article is from Dollars & Sense: Real World Economics, available at

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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.”

What Went Wrong?

The rise of Third Way-style leaders to dominance in the social democratic parties of the largest European countries does not mean the parties were transformed root-and-branch to these politics, nor even that all the important politicians in these parties went over to Third Way politics. There were important intra-party struggles in all these parties. In the British Labour Party, for example, there is famously a divide between traditionally social democratic “Old Labour” and Blairite “New Labour.” In the German Social Democratic Party, a similar divide ultimately led to the left split off and the founding of Die (“The Left”). In none of these parties were old-style social democratic politics extinguished.

That said, it’s neither a correct nor a satisfying explanation to say that the parties were simply steered toward the right by misleaders. Rather, we have to trace the ebb of class-struggle politics in the social democratic parties of Europe—from radical origins, to the robust reformism of the social democratic heyday, to the quasi-neoliberalism of the present—to a combination of causes, some intrinsic to social democratic politics and some rooted more particularly in European and world events of the late 20th century.

The intrinsic causes include the fact that the social democratic parties are reconciled to the continued capitalist organization of economic life—in which the main means of production (factories, machinery, land, etc.) are privately owned, most people do not own means of production and so make a living by working for pay (for those who do), and goods are produced for sale in markets with the aim of private profit. The social democratic project, as it evolved in the 20th century, foreswore the expropriation of the capitalists and the abolition of the wage system in favor of the redistribution of incomes within the framework of capitalism.

Continued capitalist control of investment—and with it, the determination of output and employment—has constrained the social democratic parties and governments to programs consistent with capitalist accumulation. Policies undermining “business confidence” could result in a “capital strike” (refusal of capitalists to invest) dragging down economic growth and employment, reducing the income available to redistribute, and undermining the government’s popular support. As the great Marxist economist Michal Kalecki put it in his famous essay “Political Aspects of Full Employment” (1943): “Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment .... This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.”

Social democratic success in winning elections and gaining office has depended not only on building fervent support among workers, but also tempering the opposition of capitalists. (Lest the capitalists resort to extreme measures—not only “capital strikes,” but even support for reactionary paramilitary movements or military coups—to prevent such a party from achieving government office or to overthrow it once in office.) Social democratic leaders have proved their “respectability” to capitalists by toning down their rhetoric, marginalizing more radical currents in their parties, recruiting mainstream academics, policymakers, and business figures into prominent positions, and governing “responsibly” at local and regional levels prior to achieving national office.

A striking recent example, not from Europe but exhibiting similar dynamics, is that of the Brazilian Workers’ Party (Partido dos Trabalhadores, or PT). The party was born, along with newly strong and combative union movement, in the industrial heartland of Brazil during the country’s period of military dictatorship (1964-1984). It played an important role in the transition to civilian rule and electoral government, but its leader Luiz Inácio Lula da Silva (usually referred to simply as “Lula”) lost presidential elections in 1989, 1994, and 1998. Lula’s image transformation by the 2002 election campaign was unmistakable.

“It’s not just that Lula has swapped his jeans for dark suits,” financial journalist Jonathan Weekly wrote at the time. “He has also traded his anticapitalist rhetoric for a pragmatic approach that accepts the need to meet fiscal targets negotiated with the International Monetary Fund. His running mate ... is president of one of Brazil’s biggest textile manufacturers, Coteminas. And Lula is backed by senior figures in the powerful São Paulo Federation of Industry.” Wheatley quoted a Brazilian executive and Lula supporter as saying that the PT leader had become “less of a revolutionary man and more of a statesman. I would never have supported him in the past.” The only thing distinctive about this transformation was that it happened so quickly—in a span of little more than two decades. The same thing had happened in the social democratic parties of Europe over a longer period, often with the eclipse of one generation of leaders by a subsequent, more accommodating generation.

The capitalist class—comprising those who exercise ownership or control over industrial or financial companies, the stockholders, bankers, executives, and so on—exercises a large gravitational pull on virtually all movements and organizations in capitalist societies. The leaders of working-class organizations—like labor unions and political parties rooted in the workers movement (whether going by the name “socialist,” “social democratic,” “labor,” or whatever)—are not immune to this pull. They may aspire not only to the material perquisites of office, but also inclusion in the highest echelons of power and recognition as equals in status with leading capitalists and corporate executives, high-level state officials, and so on.

The changing social composition of the leaders of social democratic parties, too, likely plays into this phenomenon. Over time, these organizations have become increasingly professionalized, drawing more and more of their leaders from the “middle classes,” with fewer rising from the ranks of ordinary workers. Sociologist W.L. Guttsman observed this strikingly for the British Labour Party over the course of a little more than half a century: In 1918, nearly 90% of Labour’s parliamentarians were of working-class origins (previously doing “skilled or semi-skilled manual work or white collar jobs”). By 1970, the figure was down to less than 30%. Guttsman sums up this trend as a steady “bourgeoisification of Labour’s political elite.” This means that fewer and fewer leaders of “working class” organizations have much direct experience of class struggle at the level of the firm or industry. Also, the social distance between these leaders and ordinary workers grows, while the distance between them and other elites shrinks. Those effects probably contribute to their seeing the achievement of political objectives more as a matter of elite-level deal-making than as a test of class power.

The reformist leaderships of working-class organizations not only rejected revolutionary politics, but also demonstrated a willingness—sometimes even eagerness—to purge the movement of revolutionary currents. (In an extreme case, reformist social democrats, coming to power in Germany in the wake of the First World War, called on right-wing paramilitary units (Freikorps) to suppress a revolutionary challenge from the left. The Freikorps famously assassinated the revolutionary socialist leaders Rosa Luxemburg and Karl Liebknecht in 1919.) In the short run, this surely strengthened the control “moderate” leaders enjoyed over the parties, unions, and other working-class organizations. It also contributed to their “respectability” in elite circles, as they proved themselves bulwarks against revolution, and so to their prospects for winning elections and achieving government office. In the long run, however, it contributed to the weakening of the working class movement—and even the viability of a robust reformist project—in at least two major ways:

First, one of the factors explaining the tolerance of capitalists and state officials of reformist parties, unions, etc., is that they believe they can stave off more threatening change by making a deal with those organizations. Economic historian Gerald Friedman makes this point in regard to unions, though it also applies to other kinds of workers’ organizations: “It should go without saying that employers do not like labor unions; virtually none would promote unionization and few would even accept unionization among their workers without protest. They come to tolerate union organization only as the lesser evil when the alternative, continued, uncontrolled and unregulated labor strife, is worse. ... Like employers, politicians support unions only where the alternatives are worse, when they fear continued labor unrest and hesitate to use, or to allow employers to use, repressive force. Instead, like employers, state officials might turn to formal union organization to restrain popular unrest.” If revolutionary politics are too strong, and the leaders of reformist organizations really cannot deliver on their end of the bargain, then capitalists and the state may turn ferociously against the working-class movement in general. On the other hand, if revolutionary politics are too weak, the capitalists and the state may see less reason to compromise with the working-class movement—in that case, the “pragmatic” leaders of the movement may not see another option than more and more concessionary politics.

Second, one of the factors explaining workers’ devotion to the movement was that it embodied a grand cause. The anthem of the socialist movement, “The Internationale” (which was translated into many languages and adopted by working-class parties in many countries), for example, spoke in apocalyptic terms of a “final conflict” in which society would be transformed “to its foundations” and the poor and oppressed who had been “nothing” would be “all.” That is, it spoke not just a fight for higher wages or better conditions, not just for regulation of industry or even the construction of the welfare state, but a struggle for emancipation. There was not always a bright line between reformist and revolutionary politics, and the dream of creating a new society (and not just winning reforms) had strong, positive animating effects on socialist/social democratic politics. This continued long after the social democratic parties of Europe had, in practical terms, converted to reformist politics, though the professed goal of a new, socialist society became more and more ceremonial over time.

A Critical Juncture

As for the more particular factors, one was the crisis of capitalism in the 1970s. This varied in form and intensity in different countries, but we can illustrate the importance of this factor in the U.K. There, the capitalist class responded with a very effective mobilization and there was a dramatic turn towards neoliberalism (very closely parallel to the course of events in the United States during the same period). Just as the crisis was cast, to great effect, in the United States as a failure of “liberalism” or “big government,” so it was cast as a failure of “socialism” in Europe. In 1976, Margaret Thatcher famously put it this way: “I think [Labour has] made the biggest financial mess that any government’s ever made in this country for a very long time, and Socialist governments traditionally do make a financial mess. They always run out of other people’s money.”

The 1970s economic crisis gave rise to a period of electoral defeat for the social democratic parties in several big European countries. The Labour Party in the U.K. and the Social Democratic Party in Germany, for example, both spent a spell out of power—in the “wilderness”—and Third Way leaders sold the moderation of the parties (as if the politics of Harold Wilson or Helmut Schmidt had been all that “left wing” in the first place) as a way back to electoral success. (While the United States did not have a mass labor or social democratic party, the Democratic Party’s turn toward more “moderate” and “business friendly” politics after the electoral defeats of the 1970s and 1980s—exemplified by Bill Clinton and the Democratic Leadership Council—is a parallel development here.)

A last factor was the growing discredit of Soviet-style “actually existing socialism” as any kind of attractive alternative model to capitalism. While there was no excuse for holding up the Soviet Union as a positive example of socialism after the 1920s, many people around the world certainly did just that—both clinging to naïve illusions about life in the U.S.S.R. and engaging in shame-faced apologetics for its political and economic failings. Even before the collapse of the Communist Party regimes in Eastern Europe, the growing recognition of these failings contributed to the success of Thatcher’s famous maxim that “There Is No Alternative,” parroted by conservatives elsewhere in Western Europe. In this respect, the defeat of three possible sources of inspiration for a worldwide socialist renaissance—the May 1968 revolt in France, the Prague Spring of 1968, and the Popular Unity period in Chile (1970–1973)—together constitute one of the most important moments in twentieth century world history.

is an economist and historian and co-editor of Dollars & Sense.

: Wolfgang Müaut;nchau, “Perplexing failure of Europe’s centre-left,” Financial Times, Sept. 20, 2015 (; Council of Europe, “The European Social Charter” (; Ernest Mandel, Europe vs. America: Contradictions of Imperialism (New Left Books, 1970); Peo Hansen, In co-operation with Carl-Ulrik Schierup, “Still a European Social Model? From a Vision of a ‘Social Europe’ to the EU Reality of Embedded Neo-liberalism,” Center for Ethnic and Urban Studies, Occasional Papers on Ethnic Studies No. 26, 2005; Peo Hansen and Sandy Brian Hager, The Politics Of European Citizenship: Deepening Contradictions in Social Rights and Migration Policy (Berghahn Books, 2010); Michal Kalecki, “Political Aspects of Full Employment” (1943); Jonathan Wheatley, “Brazil: Business Likes Lula—but Wall Street Doesn’t,” Bloomberg, Oct. 14, 2002 (; W.L. Guttsman, “The British Political Elite in the Class Structure,” in Philip Stanworth and Anthony Giddens, eds., Elites and Power in British Society (Cambridge University Press, 1974); Gerald Friedman, Reigniting the Labor Movement: Restoring Means to Ends in a Democratic Labor Movement (Routledge, 2007); Margaret Thatcher, TV Interview for Thames TV This Week, Feb. 5, 1976, transcript on website of the Margaret Thatcher Foundation (

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