Spending and borrowing won't save Europe's left

As the post-crash nationalisation of Europe’s private sector lethally threatens its social model, the continent's centre-left remains caught in a credibility trap.

FT.com

Whatever happened to European social democracy? Liberal financial capitalism perished in the great crash of 2008. The shredding of the Washington consensus promised to allow Europe's centre-left to remake the bargain between state and markets. In the event, the champions of government now count themselves among victims of the crash.

Europe’s political geography is one of mostly centre-right governments challenged here and there by populist insurgents. In the few places where the centre-left holds sway it is in trouble. Elsewhere, in the more familiar role of opposition, it looks unconvincing. All the while the post-crash nationalisation of private sector debts presents a lethal threat to Europe’s cherished social model.

I hear progressive politicians complain that this is unfair. Why should voters be more trusting of those most responsible for this terrible economic mess than of those who have always believed in fettered markets? There are two answers to this. The first is that the centre-left colluded in the credit boom: as long as the money was there to be redistributed, no one asked too many questions. The second, and more important, is that the progressive response in the aftermath of the crash has been wholly unconvincing.

France’s Socialist government looks to be in office but not in power. Francois Hollande was in difficulties well before the tax evasion scandal now engulfing his administration. As it happens the president is not a madcap leftie. By French standards, his reforms are halfway radical. But his election victory was essentially a rejection of Nicolas Sarkozy. Without much of a grand plan of his own, Hollande has failed to show that elusive but vital leadership quality known as 'grip'. Instead, his government has come to be defined by a barmy plan for a 75 per cent tax rate on the rich.

On the other side of the Channel, Ed Miliband's Labour party looks at first glance to be prospering in opposition. Britain has a Tory prime minister with no discernible strategic ambition at the head of a coalition whose economic policies have run aground. The economy is flatlining and the UK’s fiscal deficit will soon be larger than that of Greece.

For all that, Labour’s lead in the polls is misleading. As disenchanted as they are with austerity, voters show little real enthusiasm for a swerve leftward. In the event Miliband wins the 2015 election – quite possible given the coalition’s failures – few even in Labour ranks know how he would govern.

You can find such confusion across the continent. In Italy the leftist alliance of Pier Luigi Bersani was deprived of office by the anarchic populism of the Five Star Movement. No one I have spoken to in Berlin expects the Social Democrats to oust Angela Merkel in this autumn's German election. Spanish voters may resent eurozone-imposed austerity, but Mariano Rajoy’s government is more troubled by corruption than by the Socialists. In Scandinavia, the spiritual home of modern social democracy, there has been a sharp rise in anti-immigrant populism.

Many of these parties will gather in Copenhagen next week at a conference organised by the progressives’ smartest think-tank, Policy Network. Doubtless they will talk about austerity, inequality and the spreading scourge of rightwing populism. None of this will carry unless social democrats first understand what they need to do to win back trust.

Blaming it all on the bankers and railing against public spending cuts resonates with hard-pressed voters. It is also displacement activity. Olaf Cramme, the director of Policy Network, puts it well: the centre-left is caught in a credibility trap. The mistake is to confuse popular empathy for anti-austerity policies with bankable electoral support. Much as they resent cuts, voters are deeply sceptical about a bigger state funded by more borrowing.

As long as the conversation is about debt and deficits, the centre-right holds an advantage. The beginning of wisdom for the centre-left is a readiness to acknowledge the post-crash limits on the size of government. Not all public spending is good and not all cuts are bad.

Europe’s welfare state was built on growth. That is what social democrats should be talking about. What is needed, above all, is a prospectus that reaches beyond the old allegiance to Keynesian stimulus policies. Structural economic reform has a bad name on the centre-left. It should not. The big challenges to the welfare state, such as global competition and ageing populations, are structural rather than cyclical. So are the remedies.

There is nothing rightwing about tough conditions on benefits when they are combined with serious investment in human capital such as training and education. Ask the Scandinavians. Raising the pension age is about intergenerational equity. Spending on childcare provision is better than on cash benefits. Flexible labour markets can unlock jobs for young people. Public services are sometimes more effectively provided by private contractors. Social democrats should be champions of such reforms.

On one big thing Merkel is right: Europe will be able to pay for a civilised social model only if it restores its global competitiveness. Financial markets will accept the logic of more measured deficit cuts only if they are convinced that governments are committed to raising the growth potential of their economies. Voters will trust the centre-left parties with their money only if their leaders are seen to be hard-headed as well as fair. Someone once summed it up in a neat phrase about marrying social justice to economic efficiency. OK, his name was Tony Blair. On the other hand, it did win him three elections.

Copyright The Financial Times Limited 2013.