Social Europe Journal Vol. 4 No. 4 by London Metropolitan University

Social Europe Journal

Volume 4 • Issue 4 Winter 2009/2010 www.social-europe.eu

New EU New Direction Contributions by Philippe Pochet Mercedes Bresso David Held Gero Maaß Karina Mroß Jan Engels Karin Roth Sebastian Dullien Hansjörg Herr Christian Kellermann Stephen Barber

Social Europe Journal • Volume 4 • Issue 4 • Winter 2009/2010

Editorial Board Giuliano Amato Former Italian Prime Minister Stephen Barber Book Review Editor, The Global Policy Institute Stephen Haseler Chief Editor, The Global Policy Institute Klaus Mehrens The Global Policy Institute Henning Meyer Editor, The Global Policy Institute Poul Nyrup Rasmussen Former Danish Prime Minister, PES President Philippe Pochet General Director of the European Trade Union Institute (ETUI) Karin Roth German Member of Parliament Angelica Schwall-Dueren Vice Chair SPD Bundestag Group Dimitris Tsarouhas Bilkent University Ankara Social Europe Journal is published by the Global Policy Institute at London Metropolitan University

Editorial Team Jeannette Ladzik Assistant Editor Ben Eldridge Design & Layout www.beneldridge.co.uk

In cooperation with / supported by:

Social Europe Journal • Volume 4 • Issue 4 • Winter 2009/2010

Editorial

O Henning Meyer Head of the European Programme at the Global Policy Institute at London Metropolitan University and Editor of Social Europe Journal

VER THE COURSE of 2009 the European Union changed profoundly. We now have a new European Parliament, a new legal basis with the Lisbon Treaty (including a series of institutional innovations) and a new Commission. It is fair to say that as we are moving into the second decade of the new millennium, we are dealing with a new kind of EU.

But does this new EU also represent a new politics? With the global economic woes undermining much of its traditional free market agenda, can the EU change course to become more citizen orientated? And even if there is a push for a new agenda, will national governments allow the European level of governance to play a more significant role in non-economic policy fields in the future? The institutional questions are dealt with for the moment. The big issue now is how the new EU constructs a new policy agenda. Therefore we have outlined several problems in this latest issue of Social Europe Journal that ought to be considered in the process. On an organisational note, I would like to announce that we have added more elements to our website following a

reader survey last summer. We have very successfully introduced a number of monthly columnists and we will try to add even more writers in the near future. Subsequently, we will reduce the frequency of the traditional journal as the website takes centre stage. On top of regular columns and blogs, we will attempt to run topical debates on a regular basis too. The Good Society Debate was a huge success and we will build on this foundation. This way we believe we can achieve the best of both worlds: contributing to deliberations that take a long view but also provide insights and sharp commentary on a day to day basis. So, visit www.social-europe.eu if you want to stay up to date with left-of-centre political commentary.

Social Europe Journal • Volume 4 • Issue 4 • Winter 2009/2010

Contents 5 8

New Priorities for the EU Institutions Philippe Pochet New Commission, new European Parliament, new Treaty: What are the Priorities for progressive local and regional elected Representatives as a new institutional Cycle begins? Mercedes Bresso

The changing Face of Global Governance: between past Strategic Failure and Future Economic Constraints David Held

After the European Elections: Why we need a more European Social Democracy and more Social Democratic Europe Gero Maaß, Karina Mroß and Jan N. Engels

22 26 35

Can The State Still Be Saved? Karin Roth Good Capitalism …and what would need to change for that Sebastian Dullien, Hansjörg Herr and Christian Kellermann A Lasting Impression from the Man who would be European King? Stephen Barber

New Priorities for the EU Institutions

Philippe Pochet General Director of the European Trade Union Institute (ETUI)

HE PRIORITIES MUST be formulated, as always, in a manner that takes into account both form and content. I shall accordingly deal with both aspects, while placing greater emphasis on the latter. A first priority will be to ensure that the new institutional balance resulting from the Lisbon Treaty can be made to work. The long-term trend clearly entails a steady increase in the power of the European Council, partly because of the presence on the agenda of questions – such as foreign policy or defence – in which sovereignty remains with the member states, and also because it is the locus for coordination of sectoral policies (the Lisbon agenda and, in the future, the 2020 agenda). This trend will continue to be accompanied by a gradual weakening of the Commission, whose role, in some fields, is increasingly to act as scribe in a context of a fluctuating balance of power

‘A first priority will be to ensure that the new institutional balance resulting from the Lisbon Treaty can be made to work’ 5 Social Europe Journal Winter 2009/2010

rather than as the driving institutional and political force prescribed by the Treaty and endorsed by the classic federalists and, frequently, small states. Rather than deplore this situation, it is a question of acknowledging its existence, but it is undoubtedly the case that the establishment of a positive and dynamic equilibrium represents a central challenge for continuing integration. One prerequisite to this end is an appropriate articulation between the community method (including changes brought in by the Lisbon Treaty) and the innovations – whether of methodology or of governance – brought in by the Lisbon process and which were pretty much disregarded in the Nice Treaty revision. The second challenge – and here I refer to a matter of substance – is to learn lessons not only from the economic crisis but also, and above all, from the environmental crisis. The latter is, in my own view, much more important in that it calls into question, quite naturally, the neoliberal paradigm, but also some of the alternatives for overcoming the crisis that have been proposed by the Left. For this reason, I regard the central challenge to be the debate on post-Lisbon (code name 2020 agenda). It is not a question of

contemplating the successes – if any – of the Lisbon 2000 strategy and its highly conspicuous failures, but of moving on and focusing on the components that structured the Lisbon process, so as to conduct debates that are geared to the future. I would like to refer to two such components. The first is an in-depth reflection on the interactions between different policy fields and their hierarchical relationship to one another; in other words, the effort to find ways of moving beyond a sectoralised approach to the future in favour of the adoption of a holistic vision. This requires selecting the central paradigm in relation to which policies are to be articulated. Lisbon 2000 chose innovation as this paradigm, thus promoting an economic approach propelled by endogenous growth, specialisation in products with strong added value, lifelong learning, and some attention to employment quality. The mid-way change of focus, as it derived from the Kok report and a new left/right balance, placed more emphasis on the market (with the ‘better regulation’ agenda, the services directive, or the Court of Justice judgements in the Viking, Laval, Rueffert and Luxembourg cases) and on employment at any cost (JOBS, JOBS, JOBS). This is, naturally, an oversimplification, and the tensions were indeed more complex, but it serves to give us an idea of how the different elements were positioned. The second component was governance and the involvement of all stakeholders in an attempt – which indeed proved a failure – at deliberative democracy. A negative effect

entailed, from the outset, by this attempt was the marginalisation of the European Parliament and the national parliaments. Even so, the question of the involvement of collective actors in the creation of a transnational public space, over and above the formal rules of elective democracy, has been posed; as has that of the increase in the legitimacy and effectiveness of decisions. The challenge for the new Commission, the new Parliament and the European Council will be to choose the dominant paradigm around which to organise a vision of the future and to establish to what specific forms of governance pursuit of this vision will entail recourse. For the time being, in the preparatory documents, the potential candidates – the market, innovation, and sustainable development – are unimaginatively presented as complementary to one another. This is an approach that reproduces the triangle, or the square if a social cohesion dimension is brought in. But what must be avoided is the superimposition of options, in other words, the failure to choose. Let us then consider the advantages of each potential candidate. Defence of the market as a central paradigm is hardly plausible, even though the results of both European and national elections indicate support for centre-right governments and an intellectual (and political) collapse of social democracy in several countries. In an attempt to avoid placing the market on the agenda in any direct manner, ‘better regulation’ – recently renamed ‘smart regu-

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lation’ – has made a comeback as the hidden face of a marketbased ideology. This is a dangerous agenda because it starts out from a claim presented as selfevident, i.e. the need for regulation to be simple in order to arrive at a perverse calling into question of public action, which is always required to offer justification of its added value, whereas the market, whatever its shortcomings, is regarded as a priori more effective. This approach is based on studies that appear not entirely sound or serious, on recourse to doubtful methodologies and on disbursement of extravagant costs (17 million euro). And this is why it is absolutely necessary to conduct a fundamental debate on the underlying causes of the crisis, one that rises above the shortcomings of regulation of the financial sector. The alternative would be a return to the initial paradigm, that of innovation. However, the coalition that provided support for this preference no longer exists, while the struggle with the United States to become the best performing economy no longer appears particularly relevant as an aim in itself. The innovation paradigm is too limited to be of central relevance in the current situation. Even so, it does constitute a means (rather than an end) in the service of the paradigm that should, according to my own view, be accorded primacy. The last remaining candidate is thus sustainable development. To date, this issue has produced little more than reams of discourse, including a considerable amount of self-adulating discourse (the so-called success of the Kyoto targets, which

‘The issue at stake is that a particular type of development able to serve as a model for the rest of the world has completely run out of steam’

is more than doubtful when elements of external flexibility – own development mechanism, joint implementation – are removed). It has also given rise to a range of sectoral policies and forms of product regulation without having been placed at the centre of the exercise to enhance policy coherence. Nor has it been placed at the top of the agenda or selected as the dominant paradigm around which other policies could be articulated. It would, of course, be possible to set aside this paradigm also, as I set aside the return of the innovation paradigm – on grounds of lack of a majority to support it – not only by making a similar claim about the absence of a political majority but also by referring to the interests of European industry. Such an argument is indeed valid but it is not decisive. The climate question projects us into our grandchildren’s future and hence into choices that require evaluation of short-term versus long-term considerations. These choices only partially reflect left/right preferences. Social democracy is in some quarters still anchored in the paradigm of productivity and ever more productivity, while some employers and moderate or right-wing politicians (whether

for personal reasons or with reference to potential markets) support more radical changes in our way of life. Similar divisions apply to the trade unions. The choice of climate change as an organising paradigm rather than innovation also rests on the belief – or lack of belief – that (technological) progress will prove able and adequate to meet and solve the environmental challenges. This is a complex question that could create shared ground between some employers (in the emerging markets for car batteries, for example) and some sections of the political and trade union left. For my own part, I believe that innovation and technology constitute only part of the answer. The issue at stake is that a particular type of development, formerly able to serve as a model for the rest of the world, has completely run out of steam. The question is not how Europe might reduce its emissions but how this can be achieved on a global scale, and this gives rise to questions of competition and cooperation. Innovation will be useful only insofar as its fruits are widely disseminated, giving rise to affordable prices and patents, or, if they are better conceived, global public goods. And so it is to an openly con-

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ducted debate on these questions that the new Commission, new Parliament and European Council should devote their efforts. Such a debate will necessarily entail mobilisation of the various instruments currently enshrined in the Treaty (hard regulation, tax harmonisation, structural funds) or developed in the context of the Lisbon process (soft law, convergence, good practices). It will extend also to forms of governance, whether through the classic channel of elective democracy (in relation to the Treaty) or the partially innovative channel of deliberative democracy (in relation to the Lisbon process). A further intellectual challenge will indeed be to reconcile Lisbon qua Treaty with Lisbon qua process.

New Commission, new European Parliament, new Treaty: What are the Priorities for progressive local and regional elected Representatives as a new institutional Cycle begins?

Mercedes Bresso President of the Socialist Group (PES) in the Committee of the Regions, President of the Piedmont region (Italy)

HE RATIFICATION OF the Lisbon Treaty at the end of last year, following eight years of institutional introspection, gives rise to mixed feelings for proponents of EU integration – relief and an element of exhaustion. The debate on the Treaty pushed its proponents into a corner, to the point where in the end – to paraphrase Churchill's definition of democracy – they came to consider this treaty as the worst form of treaty except all those other ones that could have been conceived. The battle to ratify the Treaty ultimately turned very defensive – now drawn out further into rather inglorious horse-trading over posts – so that we ended up, as it were, not quite able to see the trees for the wood. We perhaps omitted to point out that this treaty would be what we made of it; we forgot to highlight the Treaty's potential, particularly in terms of participation. In short, now is the time to leave the inertia of ratification behind us: it is time to bring this treaty to life! While this treaty will define the rules of the institutional game for the foreseeable future, it will not set policy direcDrop text here

‘Now is the time to leave the inertia of ratification behind us: it is time to bring this treaty to life!’ 8 Social Europe Journal Winter 2009/2010

tion in stone, as this falls primarily to the member state governments, the Commission and the Parliament. The scene is therefore set for a series of battles to be fought by progressive local and regional elected representatives over the implementation of the Lisbon Treaty. In this, they can draw on Lisbon's bolstering of the territorial dimension in relation to previous treaties. The first example of this is the introduction of the new objective of territorial cohesion.1 This new objective has been interpreted by EU local and regional authorities as a guarantee that regional policy will remain important to all EU member states, despite rumblings during the last round of negotiations on the financial perspectives that this policy should be re-nationalised, which will probably resurface during the debate on the financial perspectives post-2013. At the same time, the introduction of the territorial cohesion objective provides a legal basis for the requirement of carrying out territorial impact analyses prior to the presentation of EU legislation. This requirement should also lead to a qualitative leap forward in the work on the territorial impact analysis of EU legislation, the work undertaken here by the Commission to date being only in its early stages. For progressive players, this understanding of the objective of territorial cohesion is all the more important given that there are significant analogies here with what many of us believe to be the modus operandi of the horizontal social

clause2, which has probably been insufficiently discussed to date. Among the other participatory mechanisms of the Lisbon Treaty that are the focus of attention of local and regional authorities are the instrument of ‘popular initiative’ and the subsidiarity principle. The practicalities of the popular initiative procedure urgently need to be defined, and outlined in a Commission white paper. The number of member states required for an initiative to be accepted, the percentage of the population to be represented and the means by which signatures are to be collected are some of the outstanding issues in this regard. In any case, going on the many precedents in our respective member states, it is conceivable that our regions could play a certain role as an initiator, intermediary or unifying body for these popular initiatives. Furthermore, the Lisbon Treaty will also enable us to leave behind the very academic and almost virtual approach that we have had so far to the principle of subsidiarity. There will be, on the one hand, the quasi-coercive mechanism of bringing an action before the Court of Justice, which will now be open to the Committee of the Regions (CoR), making it de facto an EU institution, given that only the institutions (in the legal sense of the word) and the member states may call the Court of Justice. But this right of recourse alone does not of itself constitute a policy. On the contrary, the key will be to have the least possible recourse to the ‘coercive’ aspect of subsidiarity, namely setting mechanisms and procedures in motion for bringing to a halt pieces of legislation. Indeed the very fact of needing to set these in motion already entails the investment of a great deal of political and administrative energy in something with an uncertain outcome. That is why it will be necessary to ensure that the phase upstream of a legislative proposal meets the requirements of involving local and regional authorities on a 9 Social Europe Journal Winter 2009/2010

partnership basis: this is largely what the CoR understands by multilevel governance.3 Multilevel governance can also be viewed from another perspective: that the new responsibilities and competences of the new Commission and the new European Parliament should be put into practice in the exercise of power. For, the key issue in European policymaking is no longer simply who does what – which is stipulated in the Lisbon Treaty – or what to do, but rather how to do it. And multilevel governance should enable us to perceive regulation at EU level beyond the mere written rules and procedures laid down in the treaties. It is a question of method, which takes on a particular dimension in the current context in which a need has emerged for new forms of EU regulation in the face of economic, financial, social and climate crises. Another key area of activity for local and regional authorities is the protection of public services, which is now the subject of a specific protocol. This unprecedented text should enable better account to be taken of the specific requirements of these services, which EU integration has tended to ignore in the past in favour of those of competition law. It is, to an extent, the outcome of public rallying in recent years, followed up by Europe's progressive regional and local politicians, but also of significant developments in case law tending towards their recognition. The protocol stipulates that member states and local and regional authorities thus have ‘wide discretion […] in providing, commissioning and organising services of general economic interest’ (SGEI); on the other hand, the EU and the respective public authorities ‘shall take care that such services operate on the basis of […] economic and financial conditions, which enable them to fulfil their missions’. Furthermore, the Treaty now includes a certain number of European principles in respect of services of general interest (high level of

‘It is the political will of the Commission and the Parliament and not merely the Treaty alone that will help give new momentum to European integration’ quality, safety and affordability, equal treatment and the promotion of universal access and of user rights) and establishes a specific legal basis for the adoption of a cross-cutting text. Moreover, access to SGEI is considered an EU citizen's right under the Charter of Fundamental Rights. In the meantime, the Court of Justice is to take account of all these new provisions. The debate on the review of the EU budget for the period post-2013 is the moment of truth as regards finding out if the four cornerstones laid down by the Lisbon Treaty to bolster the territorial dimension – territorial cohesion, subsidiarity, multilevel governance and public services – will come together and result in a budget that is up to the challenges posed by the current crises, a budget that makes sense not only in the eyes of national finance ministers but also, and above all, in light of the reality on the ground and people's everyday experience. Particularly when it comes to the EU budget, history seems to repeat itself: calls to renationalise common policies – beginning with regional policy and the common agricultural policy are already being made. For this reason, the PES President, Poul Nyrup Rasmussen, and I have written to President Barroso urging the Commission to adopt a resolutely ambitious stance on this issue.4 To do this, we hope that the Commission will ally itself with a strong European Parliament, bolstered by the legitimacy it derives directly from the people, by its independence from national governments and by the 10 Social Europe Journal Winter 2009/2010

enhanced powers bestowed on it by the Lisbon Treaty. Because ultimately it is the political will of the Commission and the Parliament and not merely the Treaty alone that will help give new momentum to European integration, the need for which we all recognise. We, the socialist elected representatives at the Committee of the Regions, will help drive this momentum.

Endnotes 1 See the opinion of the Committee of the Regions on the Green Paper on Territorial Cohesion, drawn up by JeanYves Le Drian, president of the Brittany regional council (PES/F), February 2009, CdR 274/2008. 2 Article 9 of the Treaty on the Functioning of the European Union: ‘In defining and implementing its policies and actions, the Union shall take into account requirements linked to the promotion of a high level of employment, the guarantee of adequate social protection, the fight against social exclusion, and a high level of education, training and protection of human health.’ 3 See the Committee of the Regions' White Paper on multilevel governance, drawn up by Luc Van den Brande (EPP/BE) and Michel Delebarre (PES/F) in June 2009, CdR 89/2009. 4 http://www.cor.europa.eu/pesweb/ pdf/lettera_Barroso_23_10_09.pdf.

The changing Face of Global Governance: between past Strategic Failure and Future Economic Constraints The old model of Western dominance

David Held Professor of Political Science and Co-Director of the Centre for the Study of Global Governance at the London School of Economics (LSE)

Until recently, the West has, by and large, determined the rules of the game on the global stage. During the last century, western countries presided over a shift in world power – from control via territory to control via the creation of governance structures created in the post-1945 era. From the United Nations Charter and the formation of the Bretton-Woods institutions to the Rio Declaration on the environment and the creation of the World Trade Organisation, international agreements have invariably served to entrench a well-established international power structure. The division of the globe into powerful nation states, with distinctive sets of geopolitical interests, and reflecting the international power structure as it was understood in 1945, is still embedded in the articles and statutes of leading intergovernmental organisations, such as the UN, the IMF and the World Bank. Voting rights are distributed largely in relation to individual financial contributions, and geo-economic strength is integrated into decision-making procedures. The result has been susceptibility of the major international governmental organisations

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(IGOs) to the agendas of the most powerful states, partiality in enforcement operations (or lack of them altogether); their continued dependency on financial support from a few major states, and weaknesses in the policing of global collective action problems. This was dominance based on a ‘club’ model of global governance and legitimacy. Policy at the international level was decided by a core set of powerful countries, above all the G1, G5 and G7, with the rest excluded from the decisionmaking process. Today, however, that picture is changing. The trajectory of western dominance has come to a clear halt with the failure of dominant elements of western global policy over the last few decades. The West can no longer rule through power or example alone. At the same time, Asia is on the ascent. Over the last half-century, East and Southeast Asia has more than doubled its share of world GDP and increased per capita income at an average growth rate almost 2½ times that in the rest of the world.1 In the last two decades alone, emerging Asian economies have experienced an average growth rate of almost eight per cent – three times the rate in the rich world.2 As a result, Asia has been

both a stabilising influence on and steady contributor to world economic growth. According to the IMF, China alone accounted for around a third of global economic growth last year, more than any other nation, and its economy is the only one of the world’s ten biggest which is still expanding in the wake of the financial crisis.3 Other Asian economies have bounced back from the financial crisis far more quickly than anyone expected. As a recent New York Times article points out, the United States has always led the way out of major global economic crises, but this time, the catalyst is coming from China and the rest of Asia.4 They are no longer totally beholden to the US and other western countries as recipients of their exports, and this decoupling has to some extent allowed Asian economies to recover more quickly. Boosted by increased consumer spending and massive government-led investment, the region as a whole is expected to grow by more than five per cent this year – at a time when the old G-7 countries could contract by 3.5 per cent or more.5 Simply put, we are seeing a fundamental rebalancing of the world economy, with the centre of gravity shifting noticeably to the East. The trajectory of change is towards a multipolar world, where the West no longer holds a premium on geopolitical or economic power. Moreover, different discourses and concepts of governance have emerged to challenge the old western orthodoxy of multilateralism and the post-war order. At the same time, complex global processes, from the ecological to the financial, connect the fate of commu-

nities to each other across the world in new ways, requiring effective, accountable and inclusive problem-solving capacity. How this capacity can be ensured is another matter. Paradox of our times

What I call the paradox of our times refers to the fact that the collective issues we must grapple with are of growing crossborder extensity and intensity, yet the means for addressing these are weak and incomplete. While there are a variety of reasons for the persistence of these problems, at the most basic level the persistence of this paradox remains a problem of governance. We face three core sets of problems – those concerned with sharing our planet (global warming, biodiversity and ecosystem losses, water deficits), sustaining our humanity (poverty, conflict prevention, global infectious diseases) and our rulebook (nuclear proliferation, toxic waste disposal, intellectual property rights, genetic research rules, trade rules, finance and tax rules).6 In our increasingly interconnected world, these global problems cannot be solved by any one nation state acting alone. They call for collective and collaborative action – something that the nations of the world have not

been good at, and which they need to be better at if these pressing issues are to be adequately tackled. Yet, the evidence is wanting that we are getting better at building appropriate governance capacity. One significant problem is that a growing number of issues span both the domestic and the international domains. The institutional fragmentation and competition between states can lead to these global issues being addressed in an ad hoc and dissonant manner. A second problem is that even when the global dimension of a problem is acknowledged, there is often no clear division of labour among the myriad of international institutions that seek to address it: their functions often overlap, their mandates conflict, and their objectives often become blurred. A third problem is that the existing system of global governance suffers from severe deficits of accountability and inclusion. This problem is especially relevant in regard to how less economically powerful states and, hence, their entire populations, are marginalised or excluded from decision-making. Economic liberalism and international market integration

For the last two to three decades, the agenda of economic liberalisation and global mar-

‘The collective issues we must grapple with are of growing crossborder extensity and intensity, yet the means for addressing these are weak and incomplete’

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ket integration – or the Washington Consensus as it is sometimes called – has been the mantra of many leading economic powers and international financial institutions. The thrust of the Washington Consensus was to promote this view and to adapt the public domain – local, national and global – to market-leading institutions and processes. It thus bears a heavy burden of responsibility for the type of common political resistance or unwillingness to address significant areas of market failure, including: • The problem of externalities, such as the environmental degradation exacerbated by current forms of economic growth; • The inadequate development of non-market social factors, which alone can provide an effective balance between ‘competition’ and ‘cooperation’ and thus ensure an adequate supply of essential public goods, such as education, effective transportation and sound health; • The under-employment or unemployment of productive resources in the context of the demonstrable existence of urgent and unmet need; and • Global macro-economic imbalances and a poor regulatory framework – policies that led to the financial crisis. Today, there are strong grounds for doubting that the standard liberal economic approach delivers on promised goods and that global market integration is the indispensable condition of development. The implementation of such policies by the World Bank, IMF and leading

economic powers has often led to counter-productive results, at national and global levels. Countries that have benefited most from globalisation are those that have not played by the rules of the standard liberal market approach, including China, India and Vietnam. Leaving markets alone to resolve problems of resource generation and allocation misses the deep roots of many economic and political difficulties, such as the vast asymmetries of life chances within and between nation states, the erosion of the economic fortune of some countries in sectors like agriculture and textiles while these sectors enjoy protection and assistance in others, the emergence of global financial flows which can rapidly destabilise national economies, and the development of serious transnational problems involving the global commons. The financial crisis is a case in point. High levels of consumer spending in the West, fuelled by easy access to credit, underwritten by high rates of savings in exporting countries in the East (especially China), and aided by China’s fixed exchange rate and the accumulation of reserves in sovereign wealth funds, created a global liquidity overflow. The resulting asset bubbles and excess leverage, which eventually caused the crisis, were, however, not due to these factors alone. The key fault line can be traced to a ‘light touch’ regulatory system that encouraged risk-taking and allowed money to be diverted into very specific areas: mortgage securitisation and off-balance sheet activity.7 The fallout, when it came, was devastating –

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and while many financial institutions have emerged relatively unscathed, the damage to western economies has been huge. The financial crisis has to be understood as part of the structural weakness of the AngloAmerican model of capitalism – a model, which recently sought to reshape the post-war welfare state through privatisation, deregulation, and regressive tax and social policies in the name of promoting economic efficiency and market success.8 Security

From the period following WW2 until 1989, the nature of national security was shaped decisively by the contest between the United States and the Soviet Union. The dominance of the US and the USSR as world powers, and the operation of alliances like NATO and the Warsaw Pact Treaty constrained decision-making for many states in the post-war years. In the post-cold War world of the 1990s and the 2000s the constraints upon state security policy have not been eradicated but reconfigured. Instead of bipolarity, the global system now exhibits more of the characteristics of a multipolar distribution of political-economic power. Within this more complex structure the strategic and foreign policy options confronting an individual state are still defined by its location in the global power hierarchy. The war against Iraq in 2003 gave priority to a narrow security agenda, which was at the heart of the post 9-11 American security doctrine of unilateral and pre-emptive war. This agenda contradicted most of the core tenets of international politics

‘The financial crisis has to be understood as part of the structural weakness of the Anglo-American model of capitalism’ and international agreements since 1945, and had many serious implications. Among them were a return to an old realist understanding of international relations, in which states rightly pursue their national interests unencumbered by attempts to establish internationally recognised limits (such as selfdefence or collective security) on their ambitions. But if this ‘freedom’ is to be granted to the USA, why not also to Russia, China, India, Pakistan, North Korea, Iran and so on? It cannot be consistently argued that all states bar one should accept limits on their self-defined goals. The flaws of international law and multilateralism can either be addressed or taken as an excuse for the further weakening of international institutions and legal arrangements. In either event, America’s unilateralist moment proved to be short-lived – Iraq and Afghanistan have subsequently proved the dangers of such a strategy. The US and its allies generalised the wrong warfare model – the Cold War model – onto an era of fragmented, complicated conflicts, and stalled at best, lost at worse. Most armed forces of the world – military/air/navy – are still developed on a model of nation states at war with one another, and based on the organisational principle of

geopolitical state interests. And global military spending, fuelled by such preconceptions, has been on a sustained upward trend. Total global military expenditure in 2008 is estimated to have totalled $1.464 trillion, representing an increase of 4 per cent in real terms compared to 2007, and of 45 per cent over the ten-year period 1999–2008.9 To put this in perspective, it is: - 2.4 per cent of global GDP, or $217 for every person on the planet. - 13 times the total spent on all types of development aid. - 700 times the total amount spent on global health programmes. - Roughly the same as the combined total GDP of every country in Africa. - Only the total cost of the financial crisis, 8 times as large, dwarfs it. The United States accounts for the majority of the global increase – representing 58 per cent of the global increase over the last ten years, largely due to the wars in Iraq and Afghanistan, which have cost around a trillion dollars thus far.10 However, the US is far from the only country to pursue such a determined course of militarisation. China and Russia have both nearly tripled their

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military expenditure, while other regional powers – such as Algeria, Brazil, India, Iran, Israel, South Korea, and Saudi Arabia – have also made substantial contributions to the total increase. Of the five permanent members of the UN Security Council, only France has held its spending relatively steady, with a rise of just 3.5 per cent over the last decade. The effects of the global financial crisis – in particular, growing government budget deficits and the economic stimulus packages that are aimed at countering the crisis – seem to have had little effect on military spending, with most countries, including the US and China, remaining committed to further increases in the years ahead. Yet, according to the 2009 SIPRI yearbook, the most comprehensive open-source account of developments in global conflicts and security, of the sixteen major armed conflicts that were active in fifteen locations around the world in 2008, not one was a major interstate conflict.11 Militaries remain organised on a national, rather than regional or multilateral basis, with vast duplication, overlap and waste of resources. In countries like the UK and the US, spending levels are now far in excess of any plausible defensive needs, and are no longer justified on such grounds. With the exception perhaps of the US and China, no country is capable of acting independently in major conflicts or to intervene against regimes that threaten global peace and security. There is something quite baroque about existing defence positions and tactics.12 Against this background, the way we conduct military spending looks increasingly

anachronistic. It bears pointing out that total global spending on multilateral operations such as peacekeeping forces was $8.2 billion, or 0.56 per cent of total global military expenditures.13 Learning has been slow but now some of the world’s most senior military figures have taken up the challenge and are changing the way warfare is conceived. In a recent speech at Chatham House, the new head of the British Army, General Sir David Richards, warned that traditional methods and forms of warfare are becoming redundant.14 According to Richards, globalisation is increasing the likelihood of conflict with nonstate and failed state actors, and reducing the likelihood of stateon-state warfare. Despite the use of impressive amounts of traditional combat power, the US and NATO, ‘the most powerful military alliance in the history of the world’, has failed to impress or deter opponents with recourse to asymmetric tactics and technology.15 Similarly, General Stanley McChrystal, NATO’s most senior commander in Afghanistan, has warned that the West's military strategy is failing, and that a new approach is necessary. In a recently completed review, he is reported to have said that the initiative may have been handed to the Taliban by NATO forces charging like bulls at ‘matador’ insurgents and haemorrhaging with each thrust of the sword.16 What might such an approach look like? For a start, armed forces of the future will have to deal with new types of weapons systems and methods of warfare. According to General Richards, the lexicon of today is, ‘nonkinetic effects teams, counter-

IED, information dominance, counter-piracy, and cyber attack and defence’.17 Armed forces of the future will need to be relevant to emerging security challenges and the increasingly sophisticated adversaries they face. Moreover, General David Petraeus, head of the US Central Command, and the man who oversaw the 2007 and 2008 ‘surge’ in Iraq has pointed out that new techniques of warfare are not enough. He stresses the importance of a more comprehensive approach to conflict. By this he means that: While the traditional focus on the high ground, bridge crossings, and key infrastructure remains valid to varying degrees, especially, for example, in the mountainous regions of Afghanistan, the terrain that matters most is the human terrain, the people. Clearly we have to understand the people, their culture, their social structures, and how systems to support them are supposed to work – and how they do work. And our most important tasks have to be to secure and to serve the people, as well as to respect them and to facilitate the provision of basic services, the establishment of local governance, and the revival of local economies.18 The impact of the global financial crisis

The financial crisis and its aftereffects are a particular instance of both of the themes discussed so far – the end of the Washington Consensus and the decline of inter-state conflict. It will put further pressure on budgets, and put in sharp relief trade-offs on public expenditure. Of course, such trade-offs

15 Social Europe Journal Winter 2009/2010

are nothing new. The issue is less about the contraction of available money (if anything the crisis increased the money available) as it is about a shift in public priorities. Security threats are in the process of being downgraded, and at the top of the agenda is now climate and finance, as well as ringfenced domains such as the NHS. In short, a time is rapidly approaching when defence budgets will not only taper off as war supplementals disappear, but will also compete against ballooning mandatory spending programmes for fewer and fewer tax resources – all, of course, amidst an uncertain path to recovery in the US and Europe. The financial crisis has also resulted in the emergence of the G20 as the new de-facto governance coalition of powerful states – with the US and China at the forefront of all negotiations. While both countries still pay lip service to the idea of multilateralism, the shift from the G1, G5, and G8 to the G2 and the G20 reflects the changing balance of power in the world. Conclusion

Today, there is a newfound recognition that global problems cannot be solved by any one nation state acting alone, nor by states just fighting their corner in regional blocs. As demands on the state have increased, a whole series of policy problems have arisen which cannot be adequately resolved without cooperation with other states and non-state actors. There is a growing recognition that individual states are no longer the only appropriate political units for either resolving key policy problems or managing a broad

‘The financial crisis has to be understood as part of the structural weakness of the Anglo-American model of capitalism’ range of public functions. The policy packages that have largely set the global agenda – in economics and security – have been discredited. The Washington Consensus and Washington security doctrines have dug their own graves. The most successful developing countries in the world are successful because they have not followed the Washington Consensus agenda, and the conflicts that have most successfully been diffused are ones that have benefited from concentrated multilateral support and a human security agenda. Here are clear clues as to how to proceed in the future. We need to follow these clues and learn from the mistakes of the past if democracy, social justice and a renewed multilateral order are to be advanced. Or, to sum up, realism is dead, long live cosmopolitanism. The future of organised force in countries like our own is through regional and international organisations. Cooperation between states is still important, if not more so, but what has changed is the rationale, which is now deeper and more complex. The old threat was the ‘other’; the new threat is shared problems and collective threats.

Endnotes 1 Quah, Danny (2008), ‘Post 1990s East Asian Economic Growth’, unpublished, available at http://econ.lse.ac.uk/ staff/dquah/p/Post-1990seaeg-KDI-DQ.pdf. 2 The Economist (2009), ‘An Astonishing Rebound’, 13 August. 3 International Monetary Fund (2009), World Economic Outlook: Crisis and Recovery, Washington DC, International Monetary Fund. 4 The New York Times (2009), ‘Asia’s Recovery Highlights China’s Ascendance’, 23 August. 5 Ibid. 6 Rischard, Jean-Francois (2002), High Noon: Twenty Global Problems, Twenty Years to Solve Them, New York, Basic Books. 7 Blundell-Wignall, Adrian, Paul Atkinson, Se Hoon Lee (2008), ‘The Current Financial Crisis: Causes and Policy Issues’, OECD Financial Market Trends, Vol. 95, Issue 2. 8 Lim, Wonhyuk (2008), ‘The Demise of the Anglo-American Model of Capitalism’, Global Asia, Vol.3, No. 4.

16 Social Europe Journal Winter 2009/2010

9 Stockholm International Peace Research Institute (2009), SIPRI Yearbook 2009, Oxford, Oxford University Press, p. 179. 10 Ibid, p. 185. 11 Ibid, p. 69. 12 Kaldor, Mary (1982), The Baroque Arsenal, New York, Hill & Wang, and Kaldor, Mary (2007), Old and New Wars, California, Stanford University Press. 13 SIPRI Multilateral Peace Operations Database available at http://www.sipri.org/ databases/pko 14 The Guardian (2009), ‘Ships and Jets are no longer than answer – army chief’, 18 September 15 Ibid. 16 The Independent (2009), ‘The West 'is failing Afghanistan' says Nato Commander’, 1 September 17 The Guardian (2009), ‘Ships and Jets are no longer than answer – army chief’, 18 September 18 Petraeus, David (2010), ‘Counterinsurgency Concepts: What We Learned in Iraq’, Global Policy, Vol. 1 Issue 1.

After the European Elections: Why we need a more European Social Democracy and more Social Democratic Europe

Gero Maaß Head of the International Policy Analysis Unit (IPA) of the FriedrichEbert-Stiftung (FES)

Karina Mroß Studied European Studies in Maastricht and completed an internship at the IPA

Jan N. Engels Project manager at the IPA and responsible for the project ‘International Social Democracy Monitor’

EASURED AGAINST THE hopes of a positive shift in power in favour of social democracy in the wake of the financial and economic crisis, European social democracy, even if the real balance of power has barely changed, is the loser in the European elections in 2009. Leaving aside the general tendency at European elections for opposition and smaller parties to be more successful, not to mention overlaps with existing national topics and elections, the following thesis emerges with regard to the question of winners and losers in the European elections: The winners in European elections tend to be parties which have a strong and clearly identifiable stance towards the European Union. This applies to the frequently mentioned eurosceptic parties, which are to be found mainly at both ends of the political spectrum and partly in conservative spheres, but also to expressly pro-European parties, such as the Greens, which are also among the election winners. Turning our thesis the other way around, we come to an explanation of the predominantly poor performance of the European social democrats. In many countries, European policy is fiercely disputed among social democrats: France and Austria are particularly striking examples. But in the other countries, too, the party base is characterised by what can most charitably be described as an indifference towards Europe. In addition, the member countries of the Party of European Socialists

17 Social Europe Journal Winter 2009/2010

(PES) do not present a uniform front with regard to European policy aims and policy proposals. The table below shows yet again that government parties tend to be ‘punished’ disproportionately and loose seats in European elections. The SPD in Germany was able to retain its number of seats in the European Parliament but lost votes, registering its worst ever results in European elections. Social democratic parties that did manage to add to their seats in the European elections are mainly in opposition. Only Slovakia, Slovenia and Romania depart from this explanation, at first glance. In Slovenia, however, the ruling social democratic SD won only 18.5 per cent of the vote, 12 per cent less than in the last parliamentary elections. In Slovakia and Romania, the alarmingly low turnouts of 19.6 per cent and 27 per cent, respectively, and the sometimes poor state of the opposition parties must be factored in to the election analysis. Creating trust, awakening interest and thereby mobilising the voters

The low voter turnout is often mentioned as a significant factor for the poor performance of social democratic parties. A look at the statistics of the European elections shows that in particular, young people, people with few qualifications and people in the lowest income brackets did not go to the polls. The poor showing of the European social democrats is often attributed to the abstention of these cohorts. This might be true, but it is – to our opinion

SPE parties

No. of seats won Slovakia Slovenia Romania

Luxembourg Germany

In opposition

Greece Ireland Lithuania Sweden Cyprus Czech Republic Italy

Latvia (0) Malta

In government

Remained the same

– not a satisfying explanation for the defeat of the centre-left parties. Instead, the following question has to be answered: Why are these voter groups more difficult to mobilise than others? According to the Eurobarometer, the main reasons why people did not vote in the European elections are: a general lack of trust in politics (28 per cent), the belief that voting makes no difference (17 per cent) and a lack of interest in politics (17 per cent). It is precisely here that the European social democrats have to get to work. A politics that creates trust sets itself apart from the other parties and awakens interest in politics and in shaping Europe’s future. So far, it has failed to do this.

No. of seats lost

Spain Belgium (PS) Bulgaria Estonia Netherlands Austria Portugal Hungary United Kingdom Belgium (SPA) Denmark Finland France Poland

renaissance of the European nation state, however, may no longer be capable of providing robust solutions in a world characterised by new international power structures. Spheres of activity and regulatory competences need a European complement. Many social democratic parties still find it difficult to think in terms of a European horizon. We need, therefore, more ‘European courage’ for social democratic answers to the challenges of globalisation in general and the current financial and economic crisis in particular. In the future, only an active European Union will be able to shape globalisation in social terms.

Show more European courage

European elections confirm: European social democrats must also come off the defensive at national level

Many social democrats do not identify themselves with the EU, considering it largely a project of economic liberalism. Indeed, the Lisbon Process, for example – hailed in 2000 as the flagship of the member states, the majority of which were governed by social democrats – has so far failed to bring about the social Europe, which was demanded. Many, therefore, have come to see salvation as lying in the nation state. A

A decade ago, social democrats governed three-quarters of the 15 member states. Under the aegis of the adoption of the Lisbon Agenda, many imagined that the EU was basking in a social democratic era. In the meantime, Europe’s social democratic and socialist parties have come under considerable pressure, as the European elections confirmed once again. The transformation of the European party landscape is marked by sometimes dramat-

18 Social Europe Journal Winter 2009/2010

‘Social democratic parties in many places are no longer regarded as guarantors of social justice’

ic losses of trust in relation to centre parties, combined with growth in support for populist parties to the left and the right of the political spectrum. In many countries, social democracy no longer coincides with the social democratic political movement: the development of a so-called ‘soft’ conservatism (characteristic of the conservative, centre-right or Christian Democrat parties in these countries), which has taken place over the last few years – in particular in Germany, Great Britain, the Netherlands and Sweden – confronts the social democratic reformist Left with problems of hitherto unknown dimensions. At the same time, social democratic parties are coming under pressure from populist left-wing movements. Furthermore, right-wing populist parties throughout Europe are recording major increases in the size of their vote, even among formerly social democratic constituencies. Even though it would be going too far to talk of a wholesale loss of trust in relation to social democrats in Europe, it is, however, striking that precisely in the larger traditionally social democratic countries and in Scandinavia these parties have lost their shine: large parts of the population feel their Lebenswelten threatened, socio-economically, culturally and politically.2 The territory of social democracy is no longer occupied solely by social democrats: social democratic parties in many places are no longer regarded as guarantors of social justice: on the contrary, they are often considered to be heavily complicit in the new uncertainties. Many formerly loyal voters accuse them of having jumped on 19 Social Europe Journal Winter 2009/2010

the neoliberal bandwagon, which ended in the current financial and economic crisis. Against the background of the developments and uncertainties outlined here, the multitude of tasks has to be managed in such a way that social democratic parties regain credibility and again become the guardians of social democracy and a leading force in Europe: • A clear social democratic ‘narrative’, expressing values with which the party base can identify, as well as goals and policies which reflect social democracy’s traditional core concerns of social justice and social cohesion; • A credible and persuasive political leadership based on an active and democratic party, which is also in a position to learn from previous periods in government and to renew itself while in office; • Making use of all the possibilities provided by the political culture and the electoral system vis-à-vis political opponents; • A balance of activities which is technically well implemented, substantive and communicated effectively (or, in periods of opposition, proof that the government party has failed to do this); • The ability to mobilise strategic partners (above all, the trade unions); • The necessity, in a globalising world, of embedding national considerations in a European and international approach to strategy. A party’s overall stance is decisive for political success. Narrative, leadership, scope of action, balance of activities, partnerships and European/globalisation strategy must combine in one harmonious profile. At present, this can be said of very few of Europe’s social democratic parties. It is, therefore, not surprising that social democracy suffered another setback in the European elec-

tions. Only if social democrats regain a foothold at the national level can success be hoped for at the European level. Key European policy initiatives with social democratic added value

But a convincing social democratic narrative is lacking not only at the national, but also at the European level. At the core of such a European narrative should be a long-term paradigm change, leading to a social, economically sustainable and citizen-oriented Union with global influence. Both more ‘Europe’ and more social democracy is needed. European policy initiatives must be measured against the following guidelines, which promise a high degree of social democratic added value, make full use of the possibilities offered by the PES in terms of consensus building and improve the Community’s ability to act: • Live up to global responsibilities: Social democracy should make the global problems of the environment and poverty its own in order to recover national sovereignty and restore to nation states their ability to act. • Keep strategic partners in view: Are policy proposals something that strategic social partners, above all, the trade unions, can get on board with? • Strengthen democracy and responsiveness to the needs of ordinary citizens: How do we stand up for more democracy, the personalisation of European politics in elections and responsiveness to the needs of ordinary citizens, without at the same time ushering in a European state? • Develop European policy options – safeguard national accomplishments: Given the fact that global and European developments have effects on nation states’ economies, social systems and societies which they can no longer control, in future there must also be options at European level. These could also be aimed at 20 Social Europe Journal Winter 2009/2010

safeguarding room to manoeuvre and what has been achieved – above all in terms of social policy – specifically at national level, in the knowledge of the indirect effects of European policies. • Secure the functionality of the state: The financial crisis, via the economic crisis, must not be allowed to mutate into a crisis of the state, so that the public debt incurred compels the adoption of austerity measures and the advent of the so-called ‘market state’, as a result of which policy options, future viability – for example, through education – and social cohesion fall by the wayside. • Promote/take advantage of the potential for economic policy cooperation: How can the common economic policy be bolstered after the experiences of recent economic crises? In the short term, coordinated financial market regulations take priority. More European courage and enthusiasm are essential if convincing answers are to be formulated to the challenges of our time. This applies both at national and European level. Central to this is gaining the upper hand in the debate on social Europe and social globalisation. Of particular significance from the standpoint of social democracy is to establish a legal basis for the political commitment to social cohesion, on a par with competition law. But what sort of terminology should social democrats use to present their core project of developing and safeguarding decent, sustainable and worthwhile work in the European context? Only if we make ourself aware of our fundamental ideals and tried and tested arguments will we be able to come up with convincing formulations which set our standpoints and projects apart from all the others.

Synoptic table: Social democratic/socialist parties in Europe and their participation in government Country

Name

Status in national parliament

2000 Austria Belgium

Bulgaria

Cyprus

Sozialdemokratische Partei Österreichs (SPÖ) Flanders: Socialistische Partij Anders (SPA) Wallonia: Parti Socialiste (PS)

eská strana sociáln demokratická ( SSD) Socialdemokraterne

Estonia

Sotsiaaldemokraatlik Erakond (SDE) Suomen sosialidemokraattinen puolue (SDP) Parti socialiste (PS)

France Germany Greece Hungary Ireland Italy

Latvia

Lithuania

Luxembourg Malta Netherlands Poland

Portugal Romania Slovakia

Sozialdemokratische Partei Deutschlands (SPD) Panellinio Sosialistiko Kinima (PASOK) Magyar Szocialista Párt (MSZP) Irish Labour Party Partito Democratico (PD)3 Partito Socialista4 (PS) Sinistra Democratica Latvijas Soci ldemokr tisk Str dnieku Partija (LSDSP) Soci ldemokr tu savien ba (SDS) Lietuvos socialdemokrat partija (LSDP) Lëtzebuerger Sozialistesch Arbechterpartei (LSAP) Partit Laburista (MLP) Partij van de Arbeid (PvdA)

Socialni demokrati (SD)

Spain

Partido Socialista Obrero Español (PSOE) Sveriges socialdemokratiska arbetareparti (SAP) Labour Party

United Kingdom

GP (MP) GP (MP) GP (JP) GP (MP) GP (MP) GP (MP) GP (SG)

Social Democratic and Labour Party (SDLP)

Seats in the EP/ total 09

Seats in the EP/ total1

Next elect ions

4/17

7/18

2013

5/22

7/24

2011

G+A

4/17

5/18

2013

2/6

0/6

2012

7/22

2/24

2010

4/13

5/14

2011

GP (JP)

1/6

3/6

2011

2/13

3/14

2011

14/72

31/78

2012

23/99

2013

8/22

8/24

2013

Oct. 2009 GP (MP)

GP (JP)

F F

GP (MP)

4/22

9/24

2010

O – -

GP (SG) GP (MP) O O nr nr

F F A

3/12

1/13

2012

21/72

17/78

2013

0/8

0/9

2010

–

3/12

2/13

2012

1/6

2014

3/5

2013

3/25

7/27

2010

O O GP (MP) GP (MP) nr

Sojusz Lewicy Demokratycznej (SLD) Unia Pracy5 Samoobrona Rzeczpospolitej O Polskiej (SRP) Socjaldemokracja Polska (SDPL) O Partido Socialista (PS) GP (SG) Partidul Social Democrat (PSD) GP (MP) SMER – sociálna demokracia O

Slovenia

Sweden

GP (JP) GP (JP)

B lgarska Socialisti eska Partija O (BSP) Partija Balgarski Socialdemokrati O (PBS/BSD) Koalicija za B lgarija (Coalition – for Bulgaria)2 Kínima Sosialdimokratón (EDEK) O

Czech Republic Denmark

Finland

PES

O O GP (MR) GP (SG) nr

GP (JP) O GP (JP) O

O GP (MP) GP (JP) GP (MP) GP (MP) GP (MP)

7/50

9/54

2011

7/22

12/24

2013

11/33

10/35

2012

5/13

3/14

2010

2/7

1/7

2013

21/50

24/54

2012

5/18

5/19

2010

GP (SG)

F 13/72

19/78

Up to 2010

Note: PES status Status in Parliament:

F = full member; G = member of the PES group, but not F; A = associate member; O = observer status, PM = provisional member GP = government party (SG = sole governing party; MP = main partner in the government; JP = junior partner in the government; MG = minority government) O = Opposition party; nr = not represented in Parliament; – = party does not yet exist/no longer exists

Source: Authors’ research and presentation. A good overview of the election results in Europe may be found at: http://www.parties-and-elections.de

21 Social Europe Journal Winter 2009/2010

Endnotes 1 A longer version of this paper has been written for and presented at the conference “Next Left – last European Elections and their consequences for socialists” jointly organised by Foundation for European Progressive Studies and Karl Renner Institute in Brussel, 8th of September 2009. 2 A study by the Bureau of European Policy Advisers (BEPA) looked into the causes of this threefold uncertainty in its consultation paper ‘Social reality in Europe’: http://ec.europa.eu/citizens_agenda/ social_reality_stocktaking/docs/ background_document_de.pdf 3 In total, there are 785 seats and 7 groups in the European Parliament; there are also members unattached to a group. The PES has a total of 217 seats in the EP and is therefore the second largest group, behind the EPP-ED. 4 The ‘Coalition for Bulgaria’ is an amalgamation of various social democratic and communist parties, led by the BSP. PBS also belongs to the coalition. 5 The Democratici di Sinistra and the L’Ulivo coalition merged into the Partito Democratico (PD) on 14 October 2007, to which the Christian Democrats also belong. The party is therefore not a member of the PES, although individual party members are MEPs. 6 Since October 2007 a coalition party of various social democratic and socialist parties. 7 From 2001: SLD and Unia Pracy RP.

Can The State Still Be Saved? A

Karin Roth Member of the German Bundestag for the constituency of Esslingen. She is a member of the Committee on Economic Cooperation and Development, and a substitute member of the Committee on Affairs of the European Union. From 2005 to 2009 she was Parliamentary State Secretary at the Federal Ministry of Transport, Building and Urban Affairs

FTER ELEVEN YEARS in government, the German Social Democratic Party are now having to cope with their greatest electoral defeat in the post-war period. On the day of the election there was a feeling almost of unbelief about what was happening, not just among party members but also among many supporters. How was it possible for the social democrats to be so humiliated after their time in office in coalition with the Green Party, and their time in coalition with the CDU/CSU? What had they done wrong? Or, to put it another way: why had they not picked up on the negative signals from the voters? Was it just a matter of having ignored these signals, or was it the result of the political process of orientation – beginning with the Schröder-Blair paper ten years ago – that had set the party on the wrong course, and had affected the whole of Europe? According to Gerhard Schröder and Tony Blair, writing in 1999: ‘Social democrats are in government in almost all the countries of the Union. Social democracy has found new acceptance – but only because, while retaining its traditional values, it has begun in a credible way to renew its

22 Social Europe Journal Winter 2009/2010

ideas and modernise its programmes’.1 Ten years on, Europe’s political constellation has changed. Only a few social democratic governments can now be found on the political map. And this at a time when the financial and economic crisis would seem to cry out for social democratic alternatives. Within this short period of time, European social democrats have gambled away their credibility, as demonstrated by the disastrous results of the 2009 European elections. Why are people no longer voting for social democrats, though they stand for sustainable growth and social equity? Is it because their blueprints for the future have failed to produce the necessary ‘security in change’ for millions? What still remains in government policy of their fundamental values of solidarity and equity? The demise of the welfare state

After the fall of the Berlin Wall, economic and social conditions changed rapidly across the world, not just in Germany. The dynamic forces of growth in the post-communist countries, particularly in China and Russia, were fuelled so strongly that international trade levels and the globalised division of labour reached new heights. During this

phase all forms of regulation – everything organised by the state – became discredited – amongst other things because of the economic and social legacy of ‘actually existing state socialism’. Calls for the regulation of globalisation fell on deaf ears. Indeed, the opposite occurred – denationalisation and deregulation found their way into the programmes of many parties, including those of social democrats. The neoliberal Zeitgeist of free (unregulated) market economics took hold across the world. The consensus on the need for social (i.e. regulated) market economics was eroded. Despite Willy Brandt’s warning that ‘only the wealthy can afford a weak welfare state’ (an SPD electoral slogan in 1972), the modernisation theories of the Third Way were aimed at denationalisation in all fields. According to the Schröder-Blair paper: ‘Public expenditure as a proportion of national income has more or less reached the limits of acceptability. Constraints on “tax and spend” force radical modernisation of the public sector and reform of public services to achieve better value for money.’ The state was reduced to its sovereign tasks. Significantly, this meant that its role was gradually rolled back in the public’s perception. The public sector share of GDP, regarded as excessive, became a synonym for collective waste at the expense of individual freedom. Regrettably, the SPD-Green tax reforms took up this idea and, among other measures, they reduced corporate tax and the top rate of income tax. Beginning in 1998, a step-by-step reduction in the top rate of tax was introduced, from 53 per cent in 1998

to 42 per cent in 2005. The basic rate dropped from 23.9 per cent to 15 per cent. There is no doubt that the public sector needed to improve its level of customer service, and that red tape needed to be eliminated. Yet the signal sent out by this approach was that the state was a necessary evil, and that the levying of taxes was unacceptable theft from the pockets of the public. This shift in attitudes is expressed in the provocative words of the philosopher Peter Sloterdijk, who talks of state kleptocracy, and depicts a modern finance minister as a ‘Robin Hood who has sworn an oath to the constitution’.2 Sloterdijk argues that the present is stealing from the future, and reaches the conclusion that compulsory taxation should be abolished, with voluntary support from the rich being relied on instead. These sentiments reflect a notion popular in all sections of society in Germany, and undoubtedly in other countries: that taxes should be cut in order to give individuals more, with no questions asked about the consequences within society for equality of opportunity and justice.

Certainly, the mantra of tax cuts was what drove people into the arms of the FDP and CDU/CSU in the 2009 elections – the SPD lost 520,000 voters to the FDP and 870,000 to the CDU/CSU. Although the SPD pointed out that huge debts were being incurred at the expense of future generations, voters were persuaded by neoliberal ideology that tax cuts were just and would boost the economy. Even reminders of the necessity of tax revenue for the financing of education, research, innovation and infrastructure were ignored in favour of the needs of individuals. These attitudes create the conditions for irresponsibility on the part of individuals towards society as a whole and towards the state. The motto seems to be: if everybody thinks of themselves, nobody will be forgotten. So what needs to happen? The decisive question is whether or not European social democrats will be successful in persuading people of the necessity of state benefits and investments, in the interests of equality of opportunity and social justice. Erhard Eppler has pointed out that the privatisation of the

‘Calls for the regulation of globalisation fell on deaf ears. Indeed, the opposite occurred – denationalisation and deregulation found their way into the programmes of many parties, including those of social democrats’

23 Social Europe Journal Winter 2009/2010

state’s monopoly on the use of force represents a threat to fundamental rights of freedom and justice.3 His view is that the progressive income tax that shaped Europe for one hundred years is now being abolished by neoliberals; and that plans for the introduction of a system of bands in the German income tax system will lead to the end of social equity in Germany, and that this model will eventually be emulated across Europe. As he has pointed out, these plans represent a departure for the CDU/CSU from a long-held position: ‘A man like Ludwig Erhard never had even the slightest of doubts regarding a progressive system of income tax. Under Konrad Adenauer, the top rate of tax was 53 per cent’.4 The consensus within society that ‘those with the broadest shoulders should bear a greater share of the burden’ is to be abandoned in the twentyfirst century. This means that European social democrats must urgently redefine solidarity through the use of practical political examples. The advent of the indebted state

The international financial and economic crisis in autumn 2008 led overnight to a renaissance of the state. Without the decisive action of governments in taking on state loans and guarantees, the financial markets in their entirety would have collapsed. Those who generally call for the rolling back of the state made an about-turn, and called for a state able to take on the risks and to take action, with all the implied consequences for taxpayers. States set up rescue programmes for the banks and the economy; and they organised

economic recovery programmes to avert a comprehensive global recession. The G20 states, particularly the USA, China and the European Union, acted in concert. The debts that were incurred – quite rightly – as a result of the economic crisis are intended to help boost the economy and thus safeguard jobs. And regulation of financial markets – both at international and European level – also seems to be on track, although further close observation of this process with regard to the binding nature of transparency and monitoring will continue to be necessary. So far, so good. Yet if, on top of all this, tax cuts for higher earners are now introduced in Germany, it will lead to an enormous weakening of the state and to further privatisation. As has already been the case, the high levels of debt will be used as an excuse for further privatisation by the state, including public services and social security systems. And higher state debt, incurred as a result of unjustifiable tax cuts, will exacerbate conflicts over the distribution of resources between rich and poor, which could lead to the abolition of social benefits, or to a situation in which compensation for the loss of benefits would only be available to those who had the means for private insurance. In this way, the ‘fiscal state’, which finances itself through income-dependent taxes, is gradually being replaced by a ‘fee state’ without social criteria. One example of this is the introduction of university tuition fees. Social democrats would thus be well advised to combat these developments before it is too

24 Social Europe Journal Winter 2009/2010

late. Tax policy is a central political instrument for social justice and equality of opportunity in our society. The resolution passed at the 2009 SPD conference in favour of a wealth tax is a positive signal in this context. Yet this alone will not be sufficient. We need a discussion, including at European level, about what would constitute a socially just and sustainable tax system (for example a transaction tax). The end of the nation state

Deregulation and privatisation have systematically restricted the ability of European nation states to take action; and this has been exacerbated by the decisions of the European Commission. Rivalry and competition have been transposed into national law through the rules laid down by the European Commission. In many areas, national competences and rules have even been replaced by European ones (for example the Services Directive). And there are also international deregulatory agreements that have to be implemented. Many individual citizens view the nation state as having become a mere implementor of European regulations (Brussels bureaucracy), or as unable to take action itself. On the global labour market in particular, individuals are seeing the limitations on national laws. This creeping loss of powers by the European nation states does nothing to increase the willingness of individuals to finance these states. Thus the challenge for all European social democrats in this century will be to find answers to market globalisation, with proposals for inter-

‘The ‘fiscal state’, which finances itself through income-dependent taxes, is gradually being replaced by a ‘fee state’ without social criteria. One example of this is the introduction of university tuition fees’

responsibility in civil society as elements of the state. Policymakers – particularly European social democrats – are therefore called on to shape and organise this identity process.

Endnotes 1 Europe: The Third Way/Die Neue Mitte, http://library.fes.de/pdf-files/ bueros/suedafrika/02828.pdf

national and European regulation, as, for example, called for in the SPD’s Hamburg Programme adopted at the Federal Party Conference in October 2007: ‘Where the nation state is no longer able to provide the markets with social and ecological frameworks, the European Union has to take over’. As the programme points out: ‘The federal nation state is not necessarily weakened by each conferral of decision-making power onto the EU. This also applies to taxation policy. Minimum rates for corporation taxes, decided by the EU, would even strengthen it’. As Jon Cruddas and Andrea Nahles write in their Good Society document: ‘There is an urgent need for a coordinated Europe-wide fiscal stimulus … We need to introduce Europeanwide reforms in financial and economic governance.’ Willy Brandt stressed that every era demands its own answers. Thus, social democrats in Europe must give priority to clarifying the relationship between individual nation states and the European Union, in order to avoid social Europe being weakened from within. European integration must be deepened through a new form of democratic statehood, in

order to safeguard the primacy of politics over economics, ensure cultural diversity, and allow citizens to realise their full potential. As new SPD chairman Sigmar Gabriel said at the party conference in Dresden: ‘If we take international policy seriously, a European and worldwide left is also needed, which provides clear answers from a socialdemocratic perspective, rather than varied ones. To me, these are important questions of direction, which must be asked, and on which we must strive to assert our interpretation’.5 Those who wish to live freely and in self-determination must not forget that they rely on support from the public institutions. They therefore need the state, which creates the conditions for solidarity – for equality of opportunity and social cohesion. In order to make this possible, however, social democrats must be successful in anchoring their ideas of freedom, justice and solidarity in people’s minds, in such a way that these ideas do not seem distant from people’s everyday hopes and concerns. We need a new process of understanding between the citizen and the state, in which citizens accept that they have

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2 Cicero (2009), 'Kleptokratie des Staates', 25 June. 3 Eppler, Erhard (2009), Der Politik aufs Maul geschaut. Kleines Woerterbuch zum oeffentlich Sprachgebrauch, Bonn, Dietz Verlag. 4 Eppler, Erhard (2009), Speech at SPD conference, http://www.spd.de/de/pdf/ 091115_rede_eppler.pdf. 5 Gabriel, Sigmar (2009), Speech at SPD conference, http://www.spd.de/de/091113_ rede_gabriel_bpt09.pdf.

Good Capitalism …and what would need to change for that From financial market deregulation to the ‘comeback of the state’

Sebastian Dullien Professor at the Hochschule für Technik und Wirtschaft/University of Applied Sciences in Berlin

Hansjörg Herr Professor at the Hochschule für Wirtschaft und Recht in Berlin/Berlin School of Economics and Law

Christian Kellermann Director of the Nordic Office of the Friedrich Ebert Foundation in Stockholm

The ongoing financial crisis points unmistakably to the glaring weaknesses of the present economic system. An event that seemed relatively manageable in economic terms – the real estate bubble in the United States – has brought the globalised economy to the brink of a new depression, reawakening memories of the world economic crisis of 1929. The German economy has contracted appreciably, by over 5 per cent – a situation as dramatic as any experienced since the Second World War. Even though there are some first signs of economic stabilisation and new growth in Germany, the fact of the matter is that further setbacks are entirely likely and there are very good reasons to question how sustainable this stabilisation really is. The crisis-management phase is by no means over. And what has brought the world economy to the brink is precisely what, in recent years, has been touted as its main driving force: the increasingly close linkage between international capital markets and world trade, facilitated and supported by increasingly complex financial instruments that have led to soaring

26 Social Europe Journal Winter 2009

profits. It has now turned out, in the course of the crisis, that the global financial system was in no way able to contain the negative effects that resulted when the US real estate market bubble finally burst. Indeed, the international financial system itself has served to amplify, globally, the slump in the world economy. When the crisis broke out, experts were relatively quick to agree that it would make no sense to simply seek to ‘muddle on’, at least as far as financial market regulation is concerned. A consensus soon emerged that the main cause of the turmoil besetting the global economy must be sought in the international financial markets. These, it was agreed, had, in connection with a protracted phase of underregulation, evolved into a kind of parallel world to the ‘normal’ economic system, in which even hard-boiled insiders were hard pressed to find their bearings. It was this failure of the world’s free and self-regulating financial markets that led to the initiative of the ‘systemically relevant countries’ (the G20) with regard to the regulation of the international financial markets. The G20 is now resolved to join forces in taking steps to bridle unregulated financial transactions and actors. The G20 agenda includes measures

designed to ensure more transparency and accountability on the part of the financial sphere, at the global, regional and national levels. When, in the winter of 2008/2009, it became clear that the financial crisis would have dramatic repercussions for the rest of the economy, a rethink took place at a number of levels, with the major industrialised countries and the most important emerging countries adopting massive stimulus and recovery packages and seeking to stabilise the real economy and the financial markets. In particular, the actions undertaken to rescue banks and major corporations reached proportions that had previously seemed inconceivable. All of a sudden, there was much talk of the ‘comeback of the state’, a return to a managed economic policy à la John Maynard Keynes – a return to state demand management in the economic space, an economist closely associated with the economic model that emerged in the post-War decades. Institutions such as the European Commission and the International Monetary Fund, which for decades had championed budget consolidation and improvements of supply-side conditions, were suddenly trying to outdo one another in their calls for bigger and bigger demand-side economic stimulus programmes. The discussions now centred not on whether state intervention was needed to support the economy, but on how such intervention might be effected as quickly, efficiently and cost-effectively as possible. But the public debate has, since then, proceeded far beyond these technical issues.

In political terms, we have experienced the impeachment of the market-radical vision of a ‘night watchman state’ in a system dominated (nationally and globally) by market structures. The population is showing a marked and growing aversion, not only to financial capitalism but also to the market as the one and only mechanism of economic governance. There is a growing impression that this model has failed to deliver on its promise of better living conditions for the broad mass of the population while, at the same time, generating huge incomes for individual managers and speculators. All of a sudden, calls for efforts to overcome this financial capitalism seem to be regaining political currency. But what would a new economic model look like? What shape would a ‘good capitalism’ take in a globalised world? Correcting a multiplicity of capital aberrations

In this article, we develop a proposal for a ‘good capitalism’, one geared in fundamental ways to guaranteeing social justice and ecological sustainability at a high level of prosperity. This new model, however, should in no way be seen as a fundamental counterproject to the existing

economic and social model of the kind embodied in the historical communist experiment of a socialist planned economy. While counterprojects may be intellectually stimulating, we are convinced that they have little to offer in the present situation. In the currently dominant economic model, which has evolved and taken hold just about everywhere, including Germany, since the 1970s, we see two major complexes of problems that need to be resolved – and can be resolved! First, the reforms of the past 40 years have been based on a problematic faith in the market. The market was here understood as a self-regulating mechanism that leads, more or less on its own, to stability, including high rates of employment and a halfway acceptable distribution of income. When unleashed markets proved, as they generally did, unable to deliver the desired results, the invariable response of the political sphere was to administer to the economy another stiff dose of deregulation. Second, starting in the 1970s, a growing imbalance emerged between the global market on the one side and the national level of regulation on the other. It is difficult to imagine any stable devel-

‘When unleashed markets proved, as they generally did, unable to deliver the desired results, the invariable response of the political sphere was to administer to the economy another stiff dose of deregulation’

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opment of the world economy unless and until this asymmetry has been broken down. When it comes to a new economic model, one central question that needs to be answered is what role the financial markets are to play in it. It is important here not to vilify the financial sector and its dynamism when it comes to creating and supplying credit. True, excessive lending is generally seen as the main factor behind the bubble in the US real estate market, and thus as responsible for the present crisis. But we must not forget that there is nothing wrong with credit and credit growth as such. Indeed, credit is the stuff that fuels innovation and growth. In our view, the financial sector has an important role to play in a social-ecological economy. In contrast to past years, in which financial sector transactions often ended up as the be-all and end-all, the financial sector needs once again to be the service provider for the rest of the economy. The financial markets need to supply the economy with the financial resources it needs to guarantee an optimal level of production and distribution of goods and services. They need to make available the risk capital required for innovations, above all in the ‘green economy’. But they also need to provide the ‘patient’ capital on which businesses rely to devise long-term strategies and to plan for the longer term. It is essential that the framework conditions for investment banks, fund management companies, commercial banks and other actors be formulated in such a way as to ensure that the finan-

cial sector as a whole is able to meet these challenges. The financial sector will, of course, be able to play this role only as long as it does not see itself faced with excessive debt or debt crises in individual countries or sectors. Crises of this kind tend, regularly, to destroy the equity capital the financial sector needs to supply businesses with the credit they require for their productive investments. What this implies for a new, stable growth model is that constantly rising debt levels, on the part of the state or private households, will not be able to serve in it as a driver of growth. The present crisis was preceded by gross global imbalances that found expression, in particular, in the huge US current account deficit. This clearly indicated that the United States was living far beyond its means – a state of affairs, however, from which the major exporting economies, above all China and Germany, were not at all disinclined to benefit. Intercountry imbalances of this kind may prove viable for a certain period, but once debt burdens have reached excessive levels, shaking confidence in the markets concerned, the result is inevitably capital flight, accompanied by economic stagnation. One fundamental result of our new economic model is derived from just this insight: beyond financial market regulation, it is essential to set the economic framework conditions in such a way as to ensure that it is possible to create demand without unduly increasing debt levels. Looked at in global terms, what this means is creation of demand via wages and salaries, a demand, however, that should

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rise, in the ideal case in all countries, in line with productivity and population growth. The central instrument needed to manage this demand is an active wage policy that provides for just wages and salaries for all. Any and every labour market policy, therefore, needs to give due consideration to the macroeconomic factors that feed into the creation of demand. Or, to put it differently, labour market reforms must not be allowed to endanger global economic stability – as they have until now. The task of financial policy, in turn, is to prevent growing imbalances and to correct them whenever they occur. There is a simple economic reason for this: big earners consume, in relative terms, less than small earners. And this means that raising low incomes generates a larger demand effect than granting more and more tax breaks to millionaires (to say nothing about questions of equity). Furthermore, major intercountry imbalances are an unmistakable sign of unhealthy debt trends, and they need to be prevented for this reason – this applies, it should be said, to deficits no less than to surpluses. Or, as Helmut Schmidt once put it: ‘No one should long be allowed to accumulate surpluses at the expense of all others, no one should be allowed to consume, in their own economy, the surpluses and the capital accumulated by others’. This is why the monetary policy run by a country or – in the case of Europe – a region needs to deploy new instruments, beyond the measure of key interest rate setting, to prevent and redress imbalances in both financial markets and in trade.

‘The idea of capitalism as a selfregulating system which leads to stability and welfare for all has always been wrongheaded and will remain so’ Two steps forward, without having to take one step back

The core issue underlying the question of a ‘good capitalism’ is finding the right balance between market, state and society. There are many places in which more state influence is needed to keep financial capitalism in check. This is not at all to say, however, that we need to return to the old ‘Model Germany’ of the 1970s. Nor does ‘more state’ imply any need to revoke measures undertaken to further liberalise society. While the 1970s ‘Model Germany’ achieved one of its aims, namely broader scope for long-term thinking, on the basis of a close integration of the industrial and banking sectors (commonly referred to as ‘Deutschland AG’), European integration and the globalisation of production have deprived the model of the base on which it rested. Furthermore, the model served to entrench certain questionable power structures which, in fact, needed to be overcome. Some groups in society were excluded, de facto, from the labour market, or at least from certain positions. For women, for instance, finding reasonable employment in the 1970s was more difficult than it is today. A return to the 1970s model appears, for these reasons, neither desirable nor,

indeed, even possible. Roughly the same can be said of attempts to copy the – foundering – Anglo-Saxon model, with its emphasis on short-term increases in shareholder value and its inclination to grant the financial sector exaggerated weight in the overall economy. Coming up with a new economic model is quite an ambitious project. Many of its elements would necessarily elude implementation by one country going it alone – to say nothing of Germany, which, as an EU member state, is closely integrated with its neighbours in both economic and legal terms. What is more, for a considerable number of new ideas the supranational level is, for fundamental economic reasons, the appropriate level of governance and regulation. This applies, in particular, to financial markets and their actors. Capital is highly mobile and it invariably seeks an optimal location (optimal, that is, in terms of capital interests), one that is often found in an unregulated ‘offshore centre’ with no more than the most rudimentary of oversight structures. Quite apart from issues of equity, ‘regulatory arbitrage’ of this kind serves to undercut the very possibility of effective regulation. What is called for is, therefore, a globally coordinated regulation of financial markets.

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International coordination is essential when it comes to other points as well, including, for example, the need to redress global imbalances. Be that as it may, in many areas the best place to embark on the path of conversion to a new economic model is at home. To take Germany as an example, efforts to reduce the country’s huge current account surplus could start out with a change of course in German wage policy and a tax policy geared to achieving greater redistribution effects at home. Neither of these elements would call for the coordination with other countries nor create conflicts with EU partners. And fewer imbalances in the world’s third- or fourth-largest economy would mean appreciably fewer imbalances worldwide. ‘Good capitalism’: A four-pillar model

The idea of capitalism as a selfregulating system which leads to stability and welfare for all has always been wrongheaded and will remain so. Markets need to be embedded in institutions and regulatory systems; otherwise, they tend to unleash destructive forces. The question is, therefore, not whether but how the state should intervene in markets. In order to enable capitalism to develop its productive (‘good’) dynamics, while unleashing as little as possible of its destructive tendencies, it needs to be reined in: by both state and society. The rein should not be too long, but not too short, either. In an ideal world, global capitalism is in need of global regulation – a global rein, so to speak. But many reasonable and promising measures can be taken at the

national or regional level as well. A country such as Germany has sufficient room to manoeuvre to shape its own domestic economic affairs and to decide on the degree of globalisation right for it. One feasible alternative – which in our model would rest on four pillars – would have the following shape. Pillar 1: Banks and the financial system

Financial systems are, in a manner of speaking, the ‘brains’ of the economic system. And while they are of key significance for dynamic economic development, they can also wreak havoc on an economy. In fact, a smoothly functioning financial system has, in a modern economy, at least four tasks essential for any sustainable growth process. First, by supplying businesses – and innovative businesses in particular – with newly created credit, the financial system sets the stage for investment and successful production processes. Second, by better distributing risk in general, it helps to enable business enterprises to assume more entrepreneurial risks and this tends to lead to higher levels of investment and greater economic growth. Third, a properly functioning financial system should distribute credit to those sectors and businesses that are most likely to generate sustainable growth. And fourth, one of the functions of a smoothly functioning financial system is to collect the smaller sums saved by a large number of savers and to make these resources available for major investment projects. In other words, the function of the financial system should be to

make sufficient credit available for the business sector and to support innovative businesses with higher risks. This, though, can be done without either the countless – and, in the end, virtually indistinguishable – financial products currently available or huge derivative markets that tend to proliferate at dizzying rates. Furthermore, real estate and stock markets driven by speculation and short-term orientations and business strategies geared to earning quick profits offer little or no support for the long-term development of economies. Relatively downto-earth financial systems are perfectly sufficient to expand credit and to finance investments and innovations. What needs to be done • Retention of a multi-tiered banking system with a strong public-sector component (savings and cooperative banks) • Adoption of stricter rules governing the equity that banks are required to hold to cover all possible balance sheet risks; high risks need to be transparent and secured by sufficient equity • Countercyclical formulation of financial market regulation (reduction of the role played by bank-specific quantitative risk models, reform of Basel II) • Creation of a European banking oversight agency • A strict ban on transactions with offshore centres • Regulation of all financial institutions, keyed to their specific functions in the market • Adoption of new rules on securitisation, including a licensing or testing agency for financial products and retention of the highest-risk shares

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•

• •

•

when debt instruments are resold Setup of a clearing centre for derivatives and a strict ban on OTC transactions Expansion of the powers of banking and financial market oversight agencies, enabling them, in the future, to collect and aggregate financial market data and to adopt a macroeconomic perspective Abandonment of the principle of ‘fair-value accounting’ and adoption, in its place, of the lowest-value principle Reform of existing rating agencies and establishment of government rating agencies Adoption of strict rules for manager bonus systems Measures designed to correct the short-term orientation of financial markets and their impacts on the overall economy: abandonment of the shareholder-value principle in corporate management and measures designed to strengthen the role of all of a company’s stakeholders Expansion of the set of tools available to central banks to include, in addition to interest rate policy, variable equity rules for real estate credit (differentiated by sector and region) and the use of controls on the movement of capital and interventions in foreign exchange markets

Pillar 2: Wages and the labour market

Purchasing power, the central source of demand in developed economies, should be based on a relatively balanced distribution of income, and not on an expansion of consumer credit. Several measures are needed to achieve a balanced distribution

of income: first, a reversal of the long-term trend towards a falling labour share of income, which is due chiefly to the financial system’s growing power, virtually uncontrolled proliferation and increasing hunger for risk and profit. Second, the wage structure would need to be modified in such a way as to raise lowerbracket wages. Third, the state would need to use tax and spending policies, including provision of public goods, to intervene in the market-driven distribution of income. Statutory social security systems would have an important – but not the only – role to play here. What needs to be done • Wage development needs to be linked to overall productivity development, as well as to the target inflation rate set by the central bank • Adoption of unified and statutory minimum wages as a means of restricting inequalities in income distribution and preventing deflationary risks • Measures to strengthen the instrument of the industrywide wage agreement: compulsory membership in employers’ associations or decisions establishing the industry-wide applicability of collective wage agreements • Measures to strengthen workers’ rights of codetermination at the company level • Measures to condition the award of public contracts on fulfilment of minimum standards for wages and working conditions • Creation of a common unemployment insurance system at

the level of European Monetary Union (EMU), aimed, among other things, at strengthening regional coherence • Adoption of a European minimum wage anchor (with the minimum wage set at 60 per cent of the national average wage) and establishment of a European Minimum Wage Commission • Coordination of wage policy on the basis of a set of European wage guidelines • Support for the development of Europe-wide trade unions, employers’ associations and collective bargaining

• Measures to further centralise financial policy in the Eurozone based on Europewide taxes and borrowing capacities at the EU level • Deployment of a countercyclical fiscal policy at the European level, including coordination of fiscal policy in the European Monetary Union or the EU • Expansion of the EU-wide system of revenue sharing, designed to assist individual countries experiencing difficult phases of development • Adoption of a new Euro Stability and Growth Pact designed to correct current account imbalances

Pillar 3: Public budgets

A stronger role for the state in a ‘good capitalism’, with a fundamentally new regulatory framework, calls for measures to ensure that the state has the equitable and sound revenue base it needs to prevent any rise of public debt as a share of gross domestic product. Tax policy here serves, on the one hand, to correct imbalances in income distribution and, on the other, to enable investments, in particular in education, research and development, infrastructure and social security. A sound state revenue base is the sine qua non for both countercyclical stabilisation of the economy, based on automatic stabilisers, and the provision of public services of the highest quality possible. What needs to be done • Compulsory membership of all income earners in statutory old-age, health and unemployment insurance systems • Adoption of Europe-wide minimum corporate tax rates

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Pillar 4: The world

We make the case here for an economic constellation that fosters increases in productivity and innovation. This would be one marked by a stable and, at the same time, dynamic financial system and based, fundamentally, on growth in domestic or regional demand among the world’s nations, driven by increases in income and thus able to prevent major current account imbalances. The world economy should be linked to a system of relatively stable exchange rates, which could be adjusted to redress any emerging major imbalances. The principal instrument used to combat current account imbalances should be a set of monetary and fiscal policies – as well as appropriate wage policies within monetary unions, such as EMU. Exchange rates should be adjusted as soon as any excessive current account imbalances appear to be emerging. The fact that exchange rate adjustments are ruled out in monetary

unions implies a need for stronger integration of, and cooperation among, the countries which are members of such a union. What needs to be done • A return to more stable exchange rates with clear-cut rules governing adjustments which need to be effected in the face of current account imbalances. This would be achieved on the basis of improved intergovernmental coordination of monetary and fiscal policies, as well as through control of capital movements and intervention in foreign exchange markets • Assignment of a stronger role to the International Monetary Fund (IMF) in coordinating economic policy • Development of a strong international financial market oversight committee with the Bank for International Settlements in Basel, which would be entrusted with the task of monitoring the international financial markets • Assignment of a stronger role to the IMF’s Special Drawing Rights, enabling them to function, in certain ways, as a ‘world currency’ • Establishment of an international insolvency court for states, which would provide for an equitable allocation of debt burdens between (private) creditors and debtors in case a given country should find itself in an unsustainable debt situation • Global support for the provision of international public goods, including, for example, solutions for pressing environmental problems • At the European level, promo-

tion of the institutionalised Macroeconomic Dialogue between the social partners established to improve coordination of wage negotiations in national labour markets ‘Good capitalism’ stands for relatively secure economic living conditions. It is simply not acceptable that workers or business enterprises should be left at the mercy of fully destabilised markets – a situation that we recently experienced in the wake of the US subprime crisis. Precarious jobs and mass unemployment serve only to weaken trade unions and workers. What this implies is a need to pursue policies designed to keep unemployment at low levels and to eliminate the legal loopholes responsible for the creation of precarious jobs. Expanded worker rights and rights of codetermination in the workplace constitute important elements of a balance of forces between labour and capital. Even if the reforms we propose here were realised, there would still be plenty of room for markets, which must be seen, in their various dimensions, as a key element of individual liberty. That is to say, the concern is not to eliminate or replace markets but to embed them – and this applies, in particular, to financial and labour markets – in institutions and regulatory frameworks. Good capitalism is possible!

While reading one passage or another of this article, many a reader may think: Yes, this would be a good idea, but it’s completely unrealistic. Fixed exchange rates worldwide? The Americans would never go along

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with it. Higher taxes for improved redistribution of wealth in Germany? The business lobbies are too strong anyway, so what’s the point of trying? Further strengthen industrywide wage agreements in Germany? Hundreds of German economists are bound to sign protest declarations and stuff politicians’ mailboxes with them. The list could go on and on. We are convinced that such scepticism is unfounded. Economic history is full of examples of fundamental change. To give one example, for a long time it was simply inconceivable to have money not backed by precious metals, but today, not one of the world’s major currencies is officially convertible into gold or silver. During the onset of the Great Depressions in the 1930s, it was widely believed that the state was – and should rightly be – powerless when it came to countering the effects of cyclical ups and downs. Just five or six years down the road, however, John Maynard Keynes published his ‘General Theory’ and turned this mindset upside down. Until the onset of the most recent crisis, in 2007, it was likewise all but inconceivable that the governments of the United Kingdom and the United States would acquire major stakes in the largest private domestic banks: today, large chunks of the financial systems of these two countries are either fully dependent on the state or have been nationalised outright. If developments of this kind were accompanied by sustainable changes in the relationship between market and state, then there is no reason to believe that changes in the mode of econom-

‘Crises offer opportunities. Unanticipated crises often show that that there was something wrong with the economic model prevalent until they broke out’

ic activity familiar to us today should be impossible, either. Another example is the European Union. When, in 1970, the so-called Werner Plan proposed the introduction of a European currency, the idea was widely spurned as utterly utopian. Even when the Maastricht Treaty was finalised in the early 1990s, people who regarded the idea of adopting a single European currency as realistic were few and far between. The Germans in particular, it was often said, would never relinquish their beloved Deutschmark without a fight. Today, however, we are all paying our bills in euros and cents, as if that were the most natural thing in the world. That, to be sure, is not to say that the architecture of the euro functions perfectly in every dimension of our notion of a ‘good capitalism’. However, the single European currency could, in the face of the current crisis, serve to advance political integration in Europe, and this, in turn, could constitute the foundation for a further step towards our new economic model. Crises offer opportunities. Unanticipated crises often show that that there was something wrong with the economic model prevalent until they broke out. They offer an opportunity to question all of the orthodox

opinions and interests that have been handed down more or less uncritically and accepted as valid, plainly and simply because they are so widespread. In this sense, the current economic and financial crisis offers a good opportunity to step back and take a hard look at what has gone wrong with the economy in recent decades and why it is that our economic system has not always contributed to improving the wellbeing of broad masses of the population. For many people, including many Germans, the neoliberal globalisation project has meant less, or indeed no, participation in the process of social value creation. Quite the contrary, it has led to precarious living conditions, bound up with the risk of social marginalisation or, indeed, exclusion. Social security systems have, at least in part, been at the mercy of the financial markets, with professional and thus also private plans for the future being subverted by crises and new methods of management. Large and growing sectors of society increasingly feel themselves to be mere objects, helplessly exposed to the vagaries of an increasingly uncontrolled market, prone to violent swings. Resignation, or indeed social unrest, may jeopardise social cohesion. In view

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of these dangers, there can be no doubt that we need an enhanced regulatory framework for globalisation. In addition, we are convinced that financial capitalism of the kind that has emerged in recent decades, as well as deregulation of labour markets and other elements of the neoliberal project, have contributed in key ways to making the world economy far more vulnerable to economic and social disasters of the kind experienced during the Great Depression of the 1930s. The subprime crisis may be read as a reflection of this. It has unleashed the destructive aspect of this form of capitalism in the rich countries of the North, while devastating economic collapses have always been only too familiar to those living in the developing and emerging countries of the South. ‘Mishaps’ of this kind have the potential to thrust millions into poverty and to lay waste social and economic advances, which took decades to achieve, and this is why capitalism needs to be regulated in ways that will deprive it of its dangerous crisis-proneness. Although the long-term goal of creating a capitalism restrained by institutions and rules – a ‘good capitalism’ – may, at first glance, appear unrealistic, we can still envision a good number of first steps in that direction. Indeed, today they are already under political discussion. And since any long march must inevitably begin with a small step, we can follow up first changes of this kind by advancing – and transposing into practice – a multiplicity of further-reaching proposals. This is a matter of political will –

Independent Thinking from Polity EUROPE THE FALTERING PROJECT Jürgen Habermas, Johann Wolfgang Goethe University of Frankfurt The future of Europe and the role it will play in the 21st century are among the most important political questions of our time. The optimism of a decade ago has now faded but the stakes are higher than ever. The way these questions are answered will have enormous implications not only for all Europeans but also for the citizens of Europe’s closest and oldest ally – the USA. In this new book, one of Europe’s leading intellectuals examines the political alternatives facing Europe today and outlines a course of action for the future. Habermas advocates a policy of gradual integration of Europe in which key decisions about Europe’s future are

put in the hands of its peoples, and a ‘bipolar commonality’ of the West in which a more unified Europe is able to work closely with the United States to build a more stable and equitable international order. This book includes Habermas’s portraits of three long-time philosophical companions, Richard Rorty, Jacques Derrida and Ronald Dworkin. It also includes several important new texts by Habermas on the impact of the media on the public sphere, on the enduring importance religion in “post-secular” societies, and on the design of a democratic constitutional order for the emergent world society.

192 pages / May 2009 978-0-7456-4640-4 HB £50.00 / 978-0-7456-4649-7 PB £15.99

To order, free phone 0800 243 407 www.politybooks.com and, of course, also of the political options available: a question of the play of forces within and between societies, of dynamics that lead to the creation of scope for political action. This is why it is important to seize the present opportunity to initiate, and implement, a series of first reforms which have the potential for long-term change. One crucial consideration here is that we clearly understand where we are headed. In recent years, many politicians have neglected the need to develop a concrete notion of what shape our society and our economic order may take at the end of the course of reforms embarked on. Many reforms have been justified on more or less defensive grounds: for example, by informing the public that these reforms were nec-

essary to rescue what is left of the welfare state. In the end, far from enhancing the economy’s powers of resistance, the changes implemented have tended more to fuel the emergence of global economic imbalances – and one important reason for this has been a lack of understanding of the wider context. However, if the model outlined here shows one thing, it is this: ‘Good capitalism’ – and, with it, an alternative to the prevailing market-liberal economic logic – is conceivable and, above all, possible!

34 Social Europe Journal Winter 2009/2010

A Lasting Impression from the Man who would be European King? Book Review Photo: Rhydian Peters

The Blair Legacy Edited by Terrence Casey Palgrave Macmillan 2009 ISBN 978-0-230-21662-4 384pp. Stephen Barber Senior Lecturer at London South Bank University, Senior Research Fellow of the Global Policy Institute (London Metropolitan University) and Book Review Editor of Social Europe Journal

UST TWO YEARS after his departure from Downing Street comes this early attempt to assess Tony Blair’s legacy as British prime minister. And it arrives at a time when Blair was being considered for the new role of President of the European Council; an ambition he was unable to realise. Such renewed interest surely focuses attention on the sometimes controversial record of this world leader. While there have been numerous accounts of his premiership (indeed a veritable avalanche in comparison to those of his immediate predecessor), many of the more serious academic treatments appeared in the first half of his decade in power. Latter accounts have tended toward the polemical, especially given the controversy over war with Iraq. As an examination of Blair’s ten years at the top then, this book sits alongside those drafted by Anthony Seldon and Peter Riddell respectively, not to mention some of the insightful articles by the likes of Vernon Bogdanor and Andrew Gamble. And as with the dilemma over a Blair European

35 Social Europe Journal Winter 2009/2010

Presidency, it leaves readers somewhat divided: did he make as big an impact as it seems at close quarters; does Europe want a ‘stop the traffic’ head (to use David Milliband’s phrasing) or a more pedestrian, consensual, chair of summits. The quandary is testament to the impact of Blair as a political figure domestically and on the world stage. Perhaps sensibly given the task, the book is a collection of essays, brought together under the deft editorship of Terrence Casey, Associate Professor of Political Science at the Rose-Hulman Institute of Technology in the United States. As a collection it includes some twenty-six scholars who tackle the question of Blair’s legacy thematically. These include Blair’s electoral record, devolution, constitutional reform, the Iraq war, foreign policy and the European Union. Casey sets himself and his fellow authors the task of analysing the impact of the Blair government organised around the key themes of politics, policy, governance and foreign affairs. Naturally, being published so soon after Blair’s departure and during the very same Parliament that marked his third consecutive general election triumph, a fair criticism is that it remains too early to assess the Blair legacy. It is a point not lost on Casey who discusses the nature of legacies early on in the book and the question of whether Blair’s really was a great reforming government. One method of assessing legacies is to examine the impact of an administration on a government’s

opposition. If for no other reason than its longevity, Blair’s government is compared to the two great reforming administrations of post-war Britain: that led by Clement Attlee 1945-51 which established in Britain the welfare state including a free at the point of delivery National Health Service, and the radical decade of Margaret Thatcher, which aimed to ‘roll back the frontiers of the state’ and instil the primacy of the market in economic and social policy. The point made is a strong one. In each case, the legacy of the government was cemented by the inaction of its successors. So in the case of Attlee, the Conservatives who held office for the next thirteen years after 1951 did not unwind the policies of that Labour government. In doing so they accepted the principles of the post-war consensus: the welfare state, nationalised industries and Keynesian economics. Similarly, Margaret Thatcher left a lasting legacy not only because of her radical reforms but because she forced the Labour party to accept and indeed embrace the market. New Labour in office accepted the Conservative’s privatisation programme and was prepared to extend it; the administration accepted the dominance of economic over social policy; and Chancellor Gordon Brown targeted the control of inflation rather than the centre-left staple of full employment. Time

‘As is widely acknowledged, the administration poured billions of additional pounds into healthcare but did not challenge the Thatcherite inheritance of markets in public services’ 36 Social Europe Journal Winter 2009/2010

will surely tell if Conservative leader, David Cameron, should he form a government following the anticipated 2010 general election, really is ‘heir to Blair’. The signs are good given that he has committed any government he leads to maintaining Labour’s public spending for the early part of the Parliament (a move which mirror’s New Labour’s own pledge in 1997 to maintain, relatively low, Tory spending commitments for the first two years of a Parliament). And, given the effects on policy of the world economic crisis, any incoming administration will have limited room for manoeuvre for some years to come. Blair’s government set itself the challenge of reforming public services; primarily health and education and increased dramatically spending on both. Calum Paton’s succinct chapter on the NHS is particularly interesting in analysing just how distinctive Blair’s government has been in this regard. As is widely acknowledged, the administration poured billions of additional pounds into healthcare but did not challenge the Thatcherite inheritance of markets in public services. Indeed the marketisation of public services was something that Blair (if not Brown) put at the heart of his public sector reforming programme. The argument advanced is that rather than simply continuing the New Public Management of the Thatcher years, Blair’s was one of New Public Administration. It used the market and business techniques but its policy culture was frenzied and it saw considerable political interference and centralised command control geared towards hitting targets and measures. Of course, internationally, Blair made a big impact, not least because of the controversy over the invasion of Iraq; a topic tackled authoritatively by David Coats and Joel Krieger under the chapter heading ‘The Mistake Heard Round the World’ and Ted Bromund’s ‘A Just War’. The latter argues that ‘Blair allowed his belief in his own per-

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suasive abilities to override the evidence that Europe was simply not interested in his brand of social democracy and patriotic, liberal internationalism’. Ironically, while it is true that European leaders lined up in opposition to Bush and Blair’s war, it is that very same persuasive power which, following the terrorist attacks on New York in 2001 and during the subsequent military campaigns as part of the so called ‘war on terror’, catapulted the British Prime Minister to become a major figure on the world stage. It is this very significance that made leaders of those same European countries hanker after him as a European President who will ‘stop the traffic’ if he lands in Beijing or Moscow. The question remains as to whether there is another chapter to his political legacy. As for being the face and voice of the EU, it seems his decade as British premiere was simply too divisive, internationally, for the 37 Social Europe Journal Winter 2009/2010

likes of Sarkozy and Merkel to countenance his return to the global stage, for now.

Social Europe Journal • Volume 4 • Issue 4 • Winter 2009/2010

Endnotes Social Europe Journal (SEJ) is the first quarterly journal, delivered electronically, addressing issues of critical interests to progressives across Europe and beyond. It was founded in late 2004 and has been continuously published since spring 2005. SEJ is above all a forum for debate and innovative political thinking. We not only deal with social democracy and European economic policy but also use ‘Social Europe’ as a viewpoint to examine issues such as globalisation, political economy, industrial policy and international relations. Primarily as an electronic journal, we encourage interactive communication between editors, authors, and readers. It is our goal to make as many readers as possible active participants of SEJ. By providing opportunities for the exchange of ideas, SEJ is the pioneer of a new form of European public realm – a public realm that grows and is shaped from the people up; driven by citizens. We are committed to publishing stimulating articles by the most thought-provoking authors. Since its founding, SEJ has published writers of the highest calibre including several Nobel laureates, international political leaders and prime ministers as well as some of the best young talent.

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