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Social Democratic Policies Under The Single Currency
Very Preliminary Draft. Do Not Quote
Ton Notermans
Paper presented at the Mini Workshop Social Democracy and Economic
Management: Can the Primacy of the Political be Regained? Robert Schuman
Centre, European University Institute, May 31, 2000
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Contents
INTRODUCTION .................................................................................................................................... 4
THE COMEBACK OF SOCIAL DEMOCRACY ................................................................................ 8
SOCIAL DEMOCRATIC POLICY OPTIONS .................................................................................. 10
ARE EMU AND SOCIAL DEMOCRACY COMPATIBLE? ........................................................... 18
LIBERAL SOCIAL DEMOCRACY .................................................................................................... 21
AT THE BEGINNING OF A NEW SOCIAL DEMOCRATIC CENTURY? .................................. 26
REFERENCES ....................................................................................................................................... 32
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Table of Figures
FIGURE 1: UNEMPLOYMENT RATES, 1980 - 1999 ...................................................................................... 13
FIGURE 2: EMPLOYMENT AND UNEMPLOYMENT IN THE NETHERLANDS ................................................... 15
FIGURE 3: A SIMPLE TYPOLOGY OF SOCIAL DEMOCRATIC POLICIES ........................................................ 23
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Introduction
Although a host of factors must be invoked to explain the recent election victories, one factor
clearly dominates, namely the disappointment with the economic outcomes of neo-liberal
policies. At a time when more than 18 million Europeans are unemployed, social polarisation
increases, and the electorally pivotal middle classes increasingly feel the threat of economic
decline, the social democratic programme of a socially responsible market economy has again
become attractive. Social Democrats, as Jos de Beus (2000B: 1) has argued, “must deal with
local constituencies that are frustrated by globalisation or disappointed with the European Way
of embedding global freedoms and risks.”
In practice this would seem to imply that, in order to succeed politically and not
disappoint the expectations of their electorate social democratic strategies in Europe must be
seen to again re-establish the primacy of the political after almost two decades of discourse in
which the overwhelming pressures of globalised markets in finance, goods, and services were
invokes at the prime justification for subordinating goals like full-employment, a fair degree of
income distribution, social protection and job-security, to the imperatives of international
markets and competitiveness. Whereas the reference to pressures of globalisation and
Europeanisation in the seventies and eighties may have played a useful role for social
democrats to justify to their electorate the pursuit of policies which in practice were rather close
to those advocated by its conservative and neo-liberal competitors (Notermans 1999), in the
longer run such a strategy proved infeasible.
First, it proved rather difficult to maintain a distinctive social democratic ideology on the
basis of a discourse which de facto claimed that, given the structural conditions of the world
economy social democratic policies unfortunately were not feasible. Secondly, whereas the
reference to external constraints undoubtedly has played a crucial role in many countries to
help social democrats solve problems of escalating inflation and budget deficits, inefficient
public management and perverse welfare state arrangements (Dyson & Featherstone 1996,
Oatley 1997), to adhere to it at a time when inflationary problems have been conquered and
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mass-unemployment, welfare state retrenchment have become the main concerns of the
electorate, is conducive to stimulating protectionist and anti-European sentiments. Indeed that
part of the left which clings to the discourse that globalisation and Europeanisation undermine
the European model of society with its relatively strong social protection and labour regulation
increasingly find themselves perilously close to the extreme right as far as policy proposals is
concerned.
The strategists of the “Third Way” are acutely aware that such a strategy will inevitably
end up in a cull de sac. If there is one clear common thread to the different national ideologies
of the “Third Way”, it is to see Globalisation and Europeanisation as an opportunity rather than
a threat. Indeed, during the last decade or so social democrats have replaced their
Conservative, Christian Democratic competitors as the most fervent advocates of
Europeanisation.
Despite the clear commitment to Europe, there is much less clarity as far as the
strategies to be pursued are concerned. Even amongst the new generation of “Third Way”
leaders the need for European concertation and harmonisation in the case of taxation polices
and welfare reform would seem rather contentious. Opinions range from the British labour
party which advocates essentially the primacy of national strategies with “co-ordination” taking
the form of learning from best practices, to German and French social democrats who suspect
that without some form of harmonisation a viscous downward spiral of tax cutting and welfare
retrenchment may ensue in the name of safeguarding national competitiveness. In terms of
macroeconomic strategies de facto agreement between Third Way advocates seems to be
stronger, namely in favour of “relaxed money by stealth” and adherence to the fiscal constraint
of the stability pact. Yet in this areas most current leaders face strongly entrenched inner-party
opposition – frequently with its stronghold in the public sector - who eventually sees the single
currency as a way to re-enact the allegedly so successful Keynesian strategies of the fifties
and sixties.
This paper will try to speculate a bit about the possible shape of social democratic
strategies for regaining the primacy of the political under the institutional conditions of a single
currency. It makes four main arguments. First, the argument that welfare state arrangements
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and labour regulations as characteristic of the European Model of Society are an impediment
to international competitiveness and hence will have to be dismantled to a substantial degree
is flawed. No doubt various forms of labour market regulation, large public sectors and some
forms of welfare state arrangements have promoted rent-seeking and have had a negative
impact on overall economic productivity, as compared to the US. However, countries with
different degrees of productivity can very well coexist in the world economy (Krugman 1996).
The price to be paid for productivity diminishing regulations is a lower real wage. Welfare state
arrangements are a form of collective consumption, which given the feasible real wage as
determined by productivity, are very well compatible with international competitiveness as long
as wage earners are willing to accept the required taxes and the concomitant lower post-tax
real wage.
Second, the economic crisis of the seventies and eighties – i.e. the so-called decline of
Keynesianism – which simultaneously implied a major ideological and political crisis for
European social democracy - was not provoked by excessive regulation, welfare states and
wages leading to inferior competitiveness but was of a purely macroeconomic nature. The
essential problems of the post-war model of welfare state Keynesianism was that it proved
impossible to reconcile competing claims on the national product under conditions of fullemployment hence leading to escalating inflation and/or budget deficits. Given the inability to
reach agreement concerning distribution via a negotiated (corporatist way) unemployment,
created by means of tight monetary policies, was reinstated as the principal mechanism for
guaranteeing nominal stability.
Third the Keynesian claim that the prosperity of the fifties and sixties was based on
successful countercyclical management is a myth. Such policies were hardly pursued during
the so-called “Golden Age” (Crafts & Toniolo 1996: 11-12) and they failed dismally when
applied on a more widespread scale in the seventies. To many social democrats
Keynesianism has come to appear as the quintessential form of economic governance which
is based on the primacy of the political. After all Keynesianism claimed that it stood in the
government’s power to correct market outcomes hence allowing economic management to be
informed by politically determined goals like full-employment and a fair degree of income
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distribution. Theoretically this argument rested on treating Consumption and Investment as
potentially interchangeable components of aggregate demand implying that a shortfall in
investment could easily be compensated for by increased public demand. In practice such a
”communist” strategies which intends to replace failing private investment activity with public
expansion has been unworkable. The prosperity of the fifties and sixties depended on buoyant
private investment demand and budget deficits. And as the experience of the seventies
showed, budget deficits cannot compensate for depressed investment. Hence, and here the
neo-liberal critique was quite right, the requirements of stimulating private investment activity
will have to inform any successful economic strategy.
Fourth, stimulating private investment activity, and here neo-liberalism erred, is
fundamentally a macroeconomic issue. Deregulation, privatization, and welfare state reform
may very well improve productivity and profitability. However, because they affect in principle
all firms in the same way they cannot be a sufficient condition for a growth in aggregate
investment, as again is shown by the coexistence in Europe of levels of profitability
comparable to those of the sixties with slow growth. Aggregate growth and investment requires
expectation of a growing market. Accordingly growth is essentially a reflexive phenomenon to
the extent that growth will occur if sufficient private investors expect it to occur. 1 Since it stands
in the power of the central bank to terminate any upswing by means of tight money, as central
banks have indeed shown impressively in the seventies, it acquires a central role in creating
expectations of growth. In other words, cheap money would appear as a necessary condition
for growth. However is not a sufficient condition for sustainable growth since sustainable
growth requires effective control of inflationary pressures.
As a result, this paper argues, social democratic strategies for regaining the dominance
of the political should preferably take the form of cheap money combined with arrangements to
prevent a resurgence of the inflationary instabilities of the seventies. Accordingly the paper
ends with a plea for “liberal social democracy” which combines elements of expansionary
monetary management with economic openness, deregulation, especially of the public sector
1
On the macroeconomic importance of self-fulfilling prophecies see also Farmer 1999.
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and fiscal tightness, in order to both stimulate growth and create economic and political
constraints on potentially inflationary market behavior.
The Comeback of Social Democracy
Despite frequent changes in tactics, strategy, and theory since its roughly one hundred
years of existence, European social democracy retains an identifiable core namely the claim
that political corrections of market outcomes are required in order for prosperity and a fair
distribution of opportunities and incomes to obtain (Bobbio 1996 Ch. 6, Giddens 1998: 40-41,
45, Sassoon 1996: 738). It is primarily this promise of a tamed and more equitable capitalism
that has accounted for the electoral attractiveness of social democracy.
Throughout its history social democracy has mainly been judged by the outcomes it
seemed able to produce than by the means to do so. Although, in some cases far into the
sixties, many party activist held that social democracy without the goal of a socialist economy
was unthinkable, the means of socialism – though frequently at the centre of social democratic
rhetoric – remained largely irrelevant for the practical policies of social democracy, exactly
because social democrats never managed to show that socialism indeed was the means to a
prosperous and equitable economy. Similarly the apparent breakdown of the Keynesian
strategies in the seventies and the increasing dysfunctionalities of the welfare state seduced
many to again predict the end of social democracy. Just as for previous generation social
democracy without socialism seemed an oxymoron, now social democracy without the
Keynesian welfare state seemed an impossibility. Yet, not the occasional failure of its
strategies, but the convincing demonstration that the ‘untamed capitalism’ - or better, the
somewhat less regulated capitalism advocated by the political rivals to its right – is
economically superior could have proven fatal to European social democracy. Such proof has
not been forthcoming, however.
Historically the more liberally oriented management of European economies has
excelled in combating inflation and reducing, or at least halting escalating public indebtedness
while at the same time being unable to come to terms with unemployment and low growth.
This was so in the 1920s when the inflation, frequently caused by expansionary policy
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management after the termination of hostilities in 1918, brought a turn to economic liberalism.
Yet, the stagnation and unemployment that accompanied the liberal recipe lay the groundwork
for the dominance of social democratic concepts of economic management, which gradually
conquered western Europe starting with the great Depression.
The experience was repeated in the 1970s and 1980s. European voters turned its back
on social democracy when the recipes of the Keynesian welfare state seemed to have become
recipes for economic destabilisation. British, German, Dutch and Danish Social Democrats, to
name just the most spectacular cases lost office around the beginning of the eighties when
their programmes seemed to aggravate rather than solve problems of inflation, unemployment
and rapidly increasing budget deficits. In the nineties those parties who succeeded social
democrats in office lost the favour of the electorate as the promise of a return to growth and
prosperity by means of a neo-liberal programme of macroeconomic austerity and deregulatory
supply side policies has become increasingly implausible. Gerhard Schröder’s and Tony Blair's
landslide victories, as well as Lionel Jospin’s somewhat less impressive victory, at heart are
nothing more or less than a mandate for effective policies against unemployment and
economic stagnation.
In retrospect then it would not seem too surprising that social democracy would
experience an impressive comeback in the nineties, even though having been declared dead
by most observers of the West European scene in the eighties. Nevertheless, the recent
election victories are not sufficient to decisively reject the thesis of the end of social democracy
as it yet has to prove that it possesses a feasible alternative to neoliberalism. Whether social
democracy will be able to consolidate its present electoral popularity will depend first and
foremost on whether it can find an answer to the economic problems it inherited from its
predecessors. It will certainly not, as many traditionalists claim, depend on the extent to which
it manages to resurrect a policy programme that remains ideologically true to the old concepts
of the Keynesian welfare state.
To what extent, then can social democratic governments translate the thesis of a tamed
capitalism into practical politics under the new institutional conditions created by Europe’s
single currency? Although all European social democrats from Kiruna to Crete readily agree
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that the process of economic globalisation requires intensified co-operation at the European
level, there has been surprisingly little high-level debate about the prospects and contours of a
European social democratic strategy under EMU. Moreover, at the level of practical policies
several social democratic governments, like e.g., the British, Danish and Dutch, seem quite
reluctant to support a social democratisation of European in the sense of harmonisation of
taxation and social security and co-ordinated macroeconomic expansion. Support for EMU
from European social democrats has first of all been informed by the problems and
opportunities that presented themselves at the national level, and has hardly even been
informed by the prospects of international co-operation.
Social Democratic Policy Options
The fears that integration threatens social democracy have mainly been based on the exit
option, which capital is seen to have gained as a result of internationalisation, and the neoliberal regime that seemed to have become established at the European level with the SEA.
Since the crucial social democratic goals of full-employment and extended welfare were seen
to be reached by means of economic regulations and policies that were costly to business,
business is expected to desert social democratic countries if given the opportunity. Fritz
Scharpf (1996), for example, argues that increased international competition means that many
of the regulatory programs including welfare state arrangements will put national business at a
competitive disadvantage and hence cannot be performed at national level any longer. Since
the institutional arrangements of the EU prejudice deregulation (negative integration) over
regulation (positive integration) Europeanisation acquires an anti social democratic bias.
Monetary union would seem to exacerbate this bias as it stimulates international economic
competition while depriving the nations states of many of their macroeconomic instruments.
Moreover, the new European level institution of the ECB displays a fundamentally restrictive
orientation.
The upshot of the argument was that for social democracy to be successful it needed to
bring about a decisive break with the neo-liberal policy tradition, which in turn required either
that the nation state again acquired a greater degree of autonomy with respect to the EU, or a
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radical change in the orientation of EMU. In the latter case EMU should be remodelled to
function as an arrangement that would allow for the pursuit of the successful expansionary
macroeconomic policies of the fifties and sixties.
But whereas the neo-liberal recipe of tight fiscal and monetary framework coupled with
deregulation and flexibilisation, have indeed failed to return European economies to fullemployment, the argument that successful social democratic strategies cannot be pursued
within the present set-up of EMU may appear increasingly doubtful. Especially since the midnineties, a number of states - frequently within the framework of corporatist social pacts
(Rhodes 2000a,b) - have developed successful strategies for reducing unemployment that did
not follow the neo-liberal recipe of radical deregulation and labour market flexibilisation, and
yet are compatible with the EMU framework since they do not rely on macroeconomic
stimulation. Four main strategies can be distinguished.
Redistribution of labour. Redistribution of labour has been practised in an inclusionary
and exclusionary variant. The latter variant brings about a reduction in unemployment rates by
excluding weaker groups from labour market participation. The main mechanisms have been
early retirement and the extensive use of disability. The inclusionary variant reduces
unemployment by distributing the available volume of labour over as many members of the
workforce as possible. Its main mechanism consists of reducing the working hours per
employee and extensive use of part-time employment.
Job creation by means of wage differentiation. In most European countries there is a
substantial potential for job creation in services, and especially personal services, that can not
be realised due to a fairly limited differentiation of wages. For the middle classes to exert a
significant demand for labour, their incomes have to be considerably in excess of the minimal
incomes. Accordingly the creation of a so-called low wage sector would seem to hold the
promise of a reduction of unemployment. A series of mechanism is available for bringing about
such a larger wage differentiation, from outright reduction of minimum wages coupled with a
more than proportional reduction in unemployment benefits to wage subsidies and tax breaks.
Job creation in the public sector. The alternative to creation of service sector jobs by
means of greater wage differentiation is high public sector employment financed by a high
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level of taxes. In this strategy the state appropriates a larger share of wage earners incomes
through taxes – hence leading to lower disposable incomes – in order to spend it in an
employment efficient way. The constellation of high taxes, comparatively low post tax incomes
and high levels of public employment presently is typical only of the Scandinavian states.
Job creation strategies for competitiveness and innovation. Judging by their
programmatic statements, innovation and competitiveness is considered by most European
social democrats the key to improved economic prosperity. High unemployment requires high
growth rates and the latter can only be achieved by an economy that is eminently competitive
in the global market place. In contrast to the neo-liberal strategy such a competitive economy
will not result automatically from a withdrawal of the state, but will rather require active state
involvement. Although most social democratic governments presently agree that a larger
degree of labour market flexibility is desirable, active state involvement is required particularly
in the areas of stimulating innovation and education. (Blair & Schröder 1999)
In the Netherlands, Britain, Sweden and Denmark, social democratic governments,
during the last few years have employed a combination a such strategies- with different
weights attached to the different elements – in order to achieve at times quite impressive
reductions in unemployment rates. As Figure 1 shows, in each of these countries
unemployment has been reduced substantially during the nineties and presently is clearly
below the average for the EU countries.
The most widely hailed example that Social democracy and EMU are compatible is no
doubt the so-called Dutch Poldermodel. Although, the UK, Sweden and Denmark and the UK
have not joined the EMU, success in these cases did not rely on the traditional social
democratic macroeconomic management. Keynesian deficit spending as a means to create
employment has been decisively rejected by all three social democratic parties. Likewise
monetary management is primarily assigned the task of providing a stable nominal framework
rather than stimulating growth. The constraints of EMU membership apparently does not pose
a insurmountable threat to social democracy’s traditional goals of full-employment, a strong
welfare state and a fair degree of income equality. Indeed as the contributions in this volume
show, in the UK, Sweden and Denmark the social democratic government members
12
responsible for economic management do not tend to see EMU membership as inimical to
their present economic policy strategies.
Figure 1: Unemployment Rates, 1980 - 1999
14
12
10
%
8
6
4
DK
NL
SW
UK
2
EU
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Source: OECD
Yet, notwithstanding recent successes there are some doubts whether present
strategies can form a blueprint for social democratic policies that will again allow it to conquer
the ideological hegemony it enjoyed during the fifties and sixties. First, as Schettkat (1999:
167) has noted the GDP growth of success cases like the Netherlands, Ireland and Denmark
is to a substantial degree due to increased competitiveness in international markets. But a
strategy of real devaluation by means of moderating wage growth more than in competing
countries essentially is a strategy for regional redistribution of labour with an obvious beggar
your neighbour character. To regain competitiveness is, no doubt essential for any firm to
survive. Similarly, individual nations can obviously increase, their levels of investment, growth
13
1999
and employment by stimulating exports. Neglecting to promote competitiveness conversely will
result in reduced employment. However, to solve the unemployment problem in the aggregate
by means of improved competitiveness in the EU would seem impossible as the bulk of the
international trade of the member countries is with each other (Martin 2000). Regional gains in
relative competitiveness per definition must be counterbalanced by regional losses.
By removing many macroeconomic instruments that might be used to correct nationally
specific shocks, EMU has promoted a sentiment of rallying around the flag, i.e., an increased
emphasis of the common national interest of political parties and labour markets parties. As
Martin Rhodes (2000a: 18, 2000b: 13-14,) argues partisan politics increasingly lose
importance in the social pacts that have sprung up in Europe, largely in response to pressures
to meet the Maastricht convergence criteria. Admittedly improving national competitiveness is
just one of the driving forces that keep these pacts together with the need for welfare reform
taking at least an equally important place. Moreover, there are largely differences in the
degree to which national wage bargaining systems have indeed engaged in a strategy of real
devaluation. Whereas Dutch wage moderation indeed has led to substantial cost advantages
with the result of a large current account surplus,2 in Spain and Italy, for example, wage
moderation mainly seems to have succeeded in keeping the inflation rate below the level
required for EMU membership rather than substantially improving competitiveness.
Second, the exclusionary variant of labour redistribution is increasingly hitting the limits
of financeability. Early retirement, the use of disability programs and other measures intended
to remove unemployed persons from the list of registered unemployment may have been a
feasible strategy for a relatively short lived crisis. In the longer run such measures however
tend to create a crisis of inactivity, which places intolerable burdens on the financing of the
welfare state (Cox 1998). Indeed one of the reasons for the electoral success of social
democracy results from the fact that exclusionary programs of labour redistribution
increasingly fail to perform their - stated or unstated - purpose of protecting the core workforce
2
Since 1994 the Dutch current account balance, as a percentage of GDP, has been
continuously above 5 percent. Source: OECD.
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as the financial burdens incurred by such a strategy require welfare state cutbacks that also
effect those in employment.
1200
12
1000
10
800
8
600
6
400
4
200
2
Hours/WAP
Unemployment Rate
0
0
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
Source: Unemployment, Working Age population, OECD; Employment, CBS.
Inclusionary strategies, on the other hand not only reduce unemployment but also
promise to relief the fiscal burden on the state. Moreover a fairer distribution of the available
work fits more easily within social democracy’s traditional emphasis on equality and the
centrality of labour. The Dutch case provides the most successful example of labour
redistribution. Despite the fact that employment growth has been well above the EU average
and has outstripped labour force growth since 1983 (Visser & Hemerijck 1997: 23-4) the
success of the Dutch model rests first of all on a more equitable distribution of labour. Given
the shortening of working hours and a substantial increase in part time employment,
employment growth measured in jobs somewhat exaggerates the extent of employment
creation. Figure 2 shows total employment, measured in hours per annum, divided by the
working age population. The measure can be interpreted as the average hours of work
15
1995
%
Hours
Figure 2: Employment and Unemployment in the Netherlands
statistically available per member of the working age population. After a long and steady
decline the figure has slightly increased since the mid nineties, but is still substantially below
the level recorded during the years of full-employment in the early seventies.
The main problem with a strategy of labour redistribution may be of a political nature, as
it will be hard to gain acceptance for the accompanying cuts in disposable income.
Redistribution as wage moderation requires a large degree of solidarity of the employed with
the unemployed. In the Dutch case such strategies to a not insignificant degree proved viable
because they coincided with a strong Calvinist tradition of moderation. As Jos de Beus
(2000A: 43) has argued: ‘Moderation is a token of the sense of public responsibility. In times of
need leaders can even become popular by advocating moderation and by referring to both old
rituals of atonement (embarrassment of riches, stagflation and pollution as sins) and more
recent success-stories (post-war reconstruction). It is possible to imitate the Dutch social pact,
yet it is impossible to import the Dutch culture of consumption.’. In Germany, for example,
where trade unions have placed great emphasis on a strategy of shorter working hours, labour
distribution has become rather unpopular because of the further cuts in disposable income it
entails at a time of stagnant hourly wages, and rising tax and social security contributions.
Redistribution of labour may be politically more acceptable if it takes place against a
background of growing demand for labour. Put differently, labour redistribution seems most
feasible as a strategy that makes the growth of labour demand more effective in terms of
numbers of jobs created.3 Yet, as far as job creation is concerned, social democracy,
according to most analyses, seems to be caught in a dilemma as it requires either
Scandinavian levels of taxation or greater income inequality.
Although it became a standard argument of the neo-liberalism of the eighties and
nineties that the high tax levels required to finance extensive public employment are
counterproductive as they reduce competitiveness, such in fact is not the case. The high level
of collective consumption in Scandinavia has its counterpart in lower disposable incomes. Put
3
An important reason for the job-effectiveness of the relatively modest Dutch employment
growth – measured in hours – is that about 60 percent of all jobs created since 1987 were of a
part-time nature (Visser & Hemerijck 1997: 30).
16
differently the high Scandinavian taxation levels merely imply that a larger part of the feasible
real wage, which is determined by the level of productivity, is appropriated by the state (E.g.,
Freeman 1997, 35, 45) Denmark, for example, with its average tax rate of around 50 percent
and its extensive welfare state simultaneously is one of Europe’s success stories in terms of
employment. Similarly, Swedish taxes and public employment levels remain at a very high
level, albeit it that the economic crisis of the early nineties has required the latter to be scaled
back somewhat.
Rather, the Scandinavian solution of public employment would seem infeasible in most
continental EU countries because of a lack of political support. In Scandinavia, with a long
tradition of centralised states and strong paternalistic elements in a dominant social
democracy, the fact that the state appropriates around half of average incomes may be
politically acceptable, but not so on the continent. Moreover, in a time of increasing public
discontent with bureaucratic rigidity and the quality of publicly provided services, strategies for
a radical expansion of the public sector are unlikely to create support even if they hold out the
promise of reduced unemployment (Scharpf 1997: 18).
With the Scandinavian road barred, the only promising strategy for job creation would
seem to be to tolerate the increasing earnings differentials, which will allow for the emergence
of a low wage service sector that will soak up unemployment. Stimulation of low wage service
employment can take a variety of forms. Strategies range from a radical deregulation of labour
markets including the removal of the protection afforded by minimum wages and social
security / unemployment benefits, to wage subsidies and tax credits. The British Labour Party
has taken the dual track of reducing social security protection for young unemployed while
providing wage cost subsidies and tax credits. The core of Jospin’s program to fight
unemployment consist of the envisaged creation of up to 350000 subsidised low wage jobs,
mainly in community services. In the Netherlands, low pay service employment has mainly
been stimulated by the introduction of special low wage scales and wage cost subsidisation.
The most common problem with such strategies would seem to be widespread
ideological resistance within those social democratic parties that have traditionally emphasised
equality. Indeed, to many on the political left of European social democracy such a strategy
17
would involve the final victory of neo-liberalism over the core convictions of social democracy.
Yet, the ideological hurdles for a strategy of wage differentiation are not necessarily as
imposing as it might seem at first sight. The existence of some discrepancy between its official
ideology and political practice has not been an uncommon feature in European social
democracy, and is rather unproblematic as long as it does not threaten electoral support.
Given that a large part of the recent victories of social democracy is due to middle class voters,
a strategy of wage differentiation may in theory stabilise this crucial vote if a low wage sector
enables the middle class to purchase some of the services that the welfare state can no longer
provide to the extent it used to, while at the same timing allowing for tax reduction due to
reduced financing burdens for unemployment. To the extent that those who will fill the new
jobs prefer low income employment to unemployment, it might not even threaten the electoral
base amongst low income earners. Put differently, to define equality as inclusion instead of
income equality (Giddens 1998: 101-4) may be politically successful.
Presently the US and UK are taken to be the paradigmatic examples for the high
employment creation potential of such low income sector strategies. With their traditionally
weak (US) or radically weakened unions (UK), deregulated labour markets, low minimum
wages, and the absence of steep income tax progression, the employment crisis of the
seventies has resulted in a large increase in earning differentials and a rapid growth of low
wage private service employment. Yet it is by no means obvious that the successes in both
countries are to be attributed mainly to rising income inequality as they have simultaneously
pursued a monetary policy different in orientation from the Bundesbank / ECB.
Are EMU and Social Democracy Compatible?
That macroeconomic stimulation, if at all, only has a minor role to play in solving the European
unemployment problem has become a shared conviction amongst the left as well as the right
since the 1970s. Admittedly the reasons vary, for some macroeconomic stimulation is futile per
se as it only creates higher inflation in the long run or hampers the necessary structural
adjustment. For others, the internationalisation of economic relations has de facto made the
application of macroeconomic stimulation impossible.
18
A look at the history of unemployment in Europe since the seventies would not seem to
confirm that macroeconomic management is unimportant. Since the seventies unemployment
in Europe has increased sharply during three relatively brief periods, and stabilised at a
successively higher level subsequently. Each increase is closely related to a period of
macroeconomic restriction. The first jump in unemployment rates occurred during the mid
seventies as a result of tight policies to fight inflationary pressures, which had already been
strong during the early seventies and subsequently increased as a result of the second oil
price shock. The second jump occurred around the late seventies and early eighties, in the
context of another oil price shock and sharply restrictive macroeconomic policies. The hitherto
last jump in unemployment rates occurred in the early 1990s and resulted from a combination
of tight policies required to satisfy the Maastricht convergence criteria and the spread of the
very tight Bundesbank stance after unification via the mechanism of fixed exchange rates.
Given that increasing unemployment has been closely related to macroeconomic
restriction it would seem plausible to suggest that the solution of Europe’s unemployment
problem would require macroeconomic expansion. The standard counter-argument claims that
the long term nature of the unemployment problem implies that it is of a structural nature. The
theoretical background – shared by Keynesians and neoclassics alike – being that, in the long
run, the level of all real variables like GDP and employment is determined by the structural
parameters of the market like the degree of wage flexibility, the degree of competition, and the
state of technology. Whereas macroeconomic management may affect economic outcomes in
the short run, in the long run market adjustment will re-establish the prior situation.
Unemployment which may have emerged in response to macroeconomic restriction, but which
does not disappear in the longer run hence by definition is structural and therefore not apt to
be cured by macroeconomic means.
Yet, after more than a decade of supply side policies the European Union as a whole
continues to suffer from mass-unemployment. Accordingly there are reasons for rethinking the
identification of macroeconomic policies with short-term demand management and
microeconomic policies with long-term supply-side factors. The problem may be illustrated with
respect to private investment activity, no doubt the most crucial variable for long run growth
19
and employment. The desired level of capacity private entrepreneurs wish to attain, and
accordingly the extent of net (dis)investment, depends critically on the expected rate of growth.
Durably higher growth rates will, ceteris paribus, imply higher demand for the firm’s products
and hence the need to durably extend the level of capacity. The overall growth rate of GDP,
however, in essence is determined by the sum of private investment decision. It follows that
objective factors like current profitability are not sufficient determinants of the level of
investment. Indeed if profitability were the core determinants of private investment, Europe’s
unemployment problem would have been solved already. Presently levels of profitability have
again become roughly comparable to what they were in the fifties and sixties. Investment
instead is crucially influenced by expectations about future growth rates. Since growth rates
depend on the expectations and according investment decisions of a myriad of independent
actors in a market economy, there is no unique, market determined rate. Instead expectation
concerning growth have an essentially self-fulfilling character; growth indeed being low if the
majority of actors expect it to be low et vice versa.
It is on the expectations determining the level of investment, hence the supply side, that
the macroeconomic regime probably has its most decisive impact. It stands in the power of
any central bank to terminate an upswing by means of sufficient restriction of credit. Incidental
phases of tight policy will, as a rule not affect longer term expectations. Yet a fundamental
change in the policy regime informing central bank behaviour must necessarily have a strong
impact on expectations. The long term nature of Europe’s unemployment hence can be
interpreted not as the result of primarily structural factors but as the outcome of a downward
adjustment of expectations in response to a change in monetary policy regime from the growth
oriented outlook of the fifties and sixties to the disinflationary outlook since the seventies
(Martin 2000).
It follows that the core impact of the present EMU, which institutionalises the
disinflationary regime at EU level, is to hamper strategies that attempt to solve the
unemployment problem by high overall growth rates and instead requires social democrats to
seek the solution in strategies of redistribution of labour – including strategies of real
devaluation – and increasing earning inequality. Moreover, a restrictive monetary regime and
20
the resulting low growth rates also reduces the effectiveness of job growth strategies relying
on wage differentiation. The demand for the services produced in a low wage sector will
depend on the overall growth rate, i.e., on the expansion of higher and middle incomes. Put
differently the lower the overall growth rate the higher the degree of wage differentiation would
need to be in order to have the same employment effect. Finally, to the extent that ECB, like
frequently done by the Bundesbank, comes to interpret rising growth and falling unemployment
as advance indicators of inflation, none of the present strategies practised by social democrats
will have a chance of succeeding. Put differently if the ECB de facto holds a high level of
unemployment to be a precondition for low inflation than any strategy for lowering
unemployment must fail as long as the macroregime remains unchanged.
Liberal Social Democracy
Whereas predictions that EMU will become the gravedigger of European social democracy
would almost certainly seem incorrect, it is very doubtful whether under the present EMU
regime social democracy will be able to develop an economic strategy that again will allow it to
dominate the discourse in economic policymaking as it did in the fifties and sixties. That the
social democratic discourse was dominant during the fifties and sixties – irrespective of
whether social democrats were in government or not – in large part was due to the positive
sum nature of the model of economic management that had emerged as a result of the great
Depression and the second world war. Vigorous private sector growth not only allowed for fullemployment but also proved a most potent weapon against inequality. Since it is an irresistible
temptation for any mass-party to claim the credits for good economic performance, the social
democratic discourse that claimed that prosperity was the result of (Keynesian) government
intervention became hard to resist also for parties of a different political hue.
The political logic of ‘Third Way’ concepts consisted in overcoming the negative sum
game of defending the interests of its welfare stand and low income clientele at the expense of
destroying the market dynamics of prosperity creation in which the faltering growth rates since
the seventies seemed to have placed social democracy. Instead politicians like Blair and
Schröder attempted to define again a positive sum concept in which the combination of a neo-
21
liberal emphasis on deregulation, flexibility and the primacy of market forces for wealth
creation was combined with an emphasis on a strong public role to promote innovation
(Schröder) and education (Blair) thereby leading to growing economy, which would provide not
only jobs for everybody but good jobs at that.
In practice such promises have been hard to fulfil, as either substantial employment
growth has been absent (as in all the large EMU members) or was combined with larger
inequality (as in Britain). Accordingly most modern social democratic immediate measure for
tackling the crisis, have an unmistakably stronger zero-sum structure – be it in the form of an
exchange of shorter working hours and lower incomes for the employed to benefit the
unemployed, or as an exchange of lower wages in return for employment. By their nature,
however, such zero sum concepts are less suitable to create broad political consensus and
instead are more vulnerable to alternative conceptions of distribution.
Most present social democratic governments hope that the painful measures that have
to be taken immediately will, in the longer run produce a virtuous cycle of strong growth of
good jobs. Electorally such a strategy might seem risky. Much of the electoral success of
social democracy was based on the voters' growing conviction that the neoliberal long-run in
which prosperity and full employment would be restored, after more than a decade of such
policies was indeed too far off into the futures. The disappointing outcome of the European
elections of 1999 for all social democratic parties except the French PS may indicate that in
the present situation social democracy may find it much harder to employ the neoliberal
strategy of deferred gratification. More important, if ‘New Social Democracy’ (see Figure 3)
were indeed to retains the emphasis on tight money as a necessary safeguard against inflation
it preaches, it is unlikely to transform economic policy management into a positive sum game.
At least a look at the 1920s – the previous period when policy making in Europe was
dominated by a combination of tight money and liberal supply side policies is not encouraging.
The inflation of the early twenties convinced policy makers of the need for tight money in the
framework of a resurrected gold standard. The massive unemployment problem was to be
solved mainly by lower wages. Notwithstanding their socialist rhetoric in terms of practical
policies social democrats saw no alternative to tight money, and, although opposed to wage
22
cuts, the labour market situation frequently left no alternative. Since the mid 1920s however,
their preferred alternative frequently came to centre on rationalisation – commonly inspired by
the US example – as a way to increase both profitability, employment and wages
simultaneously. Under a tight monetary regime however, stagnant demand meant that
rationalisation rather contributed to unemployment whereas wage cuts added to the already
present deflationary pressures. Indeed the ascendancy of ‘Keynesian’ social democracy during
the Great Depression started as a reaction to the failure of a policy regime that shared some
important convictions with the ‘New Social Democracy’ of our times.
Figure 3: A Simple Typology of Social Democratic Policies
Macro
Liberal
Expansionary
Restrictive
‘Liberal Social
Present
Democracy’
(market supporting)
‘Third Way Social
Democracy’
Micro
Interventionist
Golden Age
Until the Great
(market replacing)
‘Keynesian Social
Depression
Democracy’
‘Traditional Social
Democracy’
Also the employment growth in present-day UK and USA most likely is more related to a
more relaxed macroeconomic framework than to wage differentiation per se. As Soskice
(1998) has argued the American federal Reserve has displayed a rather different orientation
from the Bundesbank, in the sense that it loosened the reigns as soon as unemployment
increased, and growth decreased, whereas the Bundesbank apparently also saw inflationary
dangers lurking in recession situation hence making for an overall more restrictive regime
(Martin & Notermans 2000). In Britain, the forced departure from the EMU on 16 September
23
1992 provided the impetus for a regime change in monetary policy. Inflation was no longer
considered an immediate danger and instead monetary policies were to make a ‘dash for
growth’ (Stephens 1996, Ch. 11). Growth picked up almost immediately, and since British
government decided not to join EMU for the time being, that new orientation could be
maintained, with the result that the overall performance of the British economy since 1992 has
been amongst the best in Europe.
In sum, without some role for macro, an in particular monetary stimulation social
democracy is unlikely to establish a positive some solution on which a durable hegemony
could be based. This however does not mean to advocate a return to ‘Keynesian social
democracy’. Although common usage, the term Keynesian social democracy is in fact a
misnomer as Keynesian deficit spending played only a minor role. The post-war prosperity did
not rest on contracyclical spending that kept up total employment in times of depressed private
activity, but on vigorous private investment activity, which virtually eliminated any business
cycle. The role of Keynesianism in fact comes close to the role of socialist doctrines pre-1930,
which played an important ideological role for maintaining the specificity and coherence of
social democratic parties but had only limited value in terms of practical policies. Secondly,
and more important, the social democratic model of the fifties and sixties did no succumb to
neo-liberalism because of economic globalisation or due to a more or less arbitrary shift in
economic ideas but to serious endogenous dysfunctionalities. The post-war monetary regime
that allowed for a stabilisation of positive expectations of growth relied critically on a set of
labour market arrangements that successfully contained inflationary pressures despite fullemployment. Once these arrangements started to fail in the late sixties, tight money and
unemployment had to assume the role as safeguards against inflationary excesses.
A successful return to ‘Keynesian’ social democracy would hence presuppose a return
to the labour market arrangements of that period. Yet those arrangements depended on a
degree of deference of the rank and file to both union and party leadership that is
inconceivable with the presently much more diversified and individualistic labour force and
electorate. Accordingly, market forces will have to provide for a substantial part of the price
discipline formerly provided for by bi- or tripartite forms of negotiated wage setting. It is in this
24
context that the single currency, economic integration and a substantial part of the neoliberal
legacy of the eighties will play a crucial role for any successful social democratic strategy for
growth and full-employment. The elimination of the instrument of devaluation implies that the
employment consequences of excessive wage increase in individual member states will be felt
immediately; an effect further strengthened by the increased competition resulting from the
single market program. Similarly, given an appropriate monetary stimulation, the tight fiscal
constraints of the stability pact will prevent governments from trying to compensate for the
negative employment consequences of inflationary wage bargaining. Finally also more flexible
labour markets will play an important role in stabilising any social democratic growth regime to
the extent that they increase the pressure of the unemployed on the wages of the employed
and increase the incentives of the unemployed to enter the labour market.
Put differently, whereas the neoliberal doctrines of the eighties interpreted flexibilisation
and labour market deregulation as sufficient for rekindling growth, in a strategy of liberal social
democracy such measures perform the role of protecting macro oriented growth strategies
from the inflationary trap in which social democrats fell in the 1970s. The market replacing
microeconomic policies of the fifties and sixties generally were justified by a quest for equality
but came at the price of isolating large segments from market pressures, and hence directly
contributed to the emergence of high unemployment rates as a mechanism for containing
inflation. Indeed, especially social democratic parties have developed strongholds in a large
and well protected public sector; a sector moreover that frequently was at the forefront of
inflationary battles. At a time, however, when the frequently undemocratic process of
centralised wage setting with little input from local employers and employees and little concern
for local conditions, is a thing of the past, social democrats will have to accept that market
forces must play a much larger role in ensuring the compatibility of local autonomy with a
growth oriented policy regime. If indeed the removal of class and group privileges is a
ideological constant of social democracy (Grundwertekommission 1999: 20) then this will also
have to apply to the privileges extended to the social democratic clientele of blue collar and
public sector workers when protection from market forces becomes an obstacle to fullemployment.
25
On the other hand, the assignment of microeconomic policies to a counter-inflation role
implies a different emphasis from the neoliberal policies of the eighties. To name just two
examples: unemployment is not a individual choice resulting from overly generous
unemployment benefits. Accordingly cuts in unemployment benefits will do little more than
worsen the income situation of the unemployed. Instead the Danish strategy of compulsory
participation in extensive retraining programmes couple with a threat of the loss of benefits in
case of a refusal to actively seek and accept employment, is both more promising and more
equitable.4 Secondly, private sector profitability is a necessary but not sufficient condition for
growth. Trying to stimulate growth by additional tax measures intended to improve what overall
is a satisfactory profitability in Europe, is little more than an inegalitarian squandering of public
money.
At the Beginning of a New Social Democratic Century?
Not too long ago it seemed that concerning the monetary policies of the ECB the most likely
fault lines would pit the German social democrats, joined by the Dutch, against virtually
everybody else. As the policies of Schröder and Lafontiane have shown, the SPD is less and
less convinced of the wisdom of tight monetary policies. For the party Left around former
finance minister Lafontaine the main reason was that, given the sorry state of the German
budget, cheap money came to appear as the most promising alternative to wage cutting. As
the IG Metall theory that high wages are a precondition for full employment because they force
the speed of innovation has obviously failed, the SPD Left has come to advocate a return to
Keynesianism and in particular cheaper money. Admittedly the position of the party Left has
been seriously weakened since the demise of Lafontaine, but even Chancellor Schröder, who
sees much less of a role for macroeconomic expansion, cannot entirely ignore them.
Moreover, Schröder is under strong pressure to show some quick results in terms of reducing
unemployment in order to be able to commit the trade unions to his core project of a social
4
In the UK it is becoming increasingly clear that cuts in unemployment benefits, even in a
buoyant economy, fail to draw many unemployed into employment because the not only lack
professional skills but frequently have lost basic social skills, and or have come to suffer from
serious health problems (Fischermann 1999).
26
pact. Although not willing to advocating cheap money, the present German government could
not be counted on to support a tightly restrictive course on the part of the ECB.
As a result, there are presently hardly any social democrats who would openly advocate
neo-liberal strategies of tight money. As a result the European social democrats, meeting in
Pörtschach in October 1998 could agree to call upon the ECB to lower interest rates. Despite
the occasional and modest increases in interest rates, the ECB has not seemed impervious to
this political climate as the refusal to defend the parity of the Euro, despite an almost 25%
depreciation in relation to the Dollar, would suggest. Moreover, the ECB’s room of maneuver is
further tightened by the apparent absence of any inflationary threats in Europe, despite Euro
depreciation.. Without domestic inflationary problems soft currency strategies to provoke a
cumulative run on the currency. Accordingly the ECB cannot count on international currency
movements to provide support against more expansionary-minded social democrats.5
Yet the support for cheap money on the parts of European social democrats seems to
be support form a strategy of cheap money under stealth. Admittedly, within all social
democratic parties there are those who favor abolishing the independence of the ECB, from
reasons ranging from a belief in the Keynesian non-neutrality of money to objection to the
undemocratic character of central bank independence. Barring a serious deterioration of the
European economy, such a policy, however, will lack the required support amongst the
leadership. The social democratic reluctance to openly advocate a switch to a strategy of
cheap money is primarily based on the danger that it will provoke a relapse into the bad habits
of the seventies, i.e., that building a political majority for a change in monetary policy
orientation will imply also a political majority for Keynesian deficit spending and market
replacing microeconomic policies. Indeed, the demand for cheaper money is frequently voiced
by traditionalists with a strong attachment to the Golden Age social democracy. During his
brief stint at the ministry of finance Oskar Lafontaine, e.g., not only called for cheaper money
but also for higher wages in order to reduce unemployment by means of higher demand. The
latter may be very fit to win the hearts of traditionalist trade unionists and the public sector
5
For a different view see Dyson 1999: 207.
27
employees on the payroll of the minister, it is singularly ill-designed as a measure to promote
business confidence and investment.
Nevertheless, under social democratic leadership the EU does seem on its way to
develop a political counterweight to the ECB which may de facto curtails independence. The
Cologne summit of June 1999 has institutionalized a macroeconomic dialogue between the
governments the ECB and the social partners, although it should be pointed out that the
dialogue in no way binds the ECB, and hence is still far removed from the ‘ex-ante
coordination’ which, amongst others, the ETUC desires and the ECB adamantly rejects. In
addition the Lisbon summit has given a renewed push in the direction of creating a political
counterweight to the ECB, not only by placing the issue of unemployment on top of the
agenda, But, more importantly by agreeing upon an institutional framework to monitor the
commitments made. Finally, the current Europe weakens is lending increased support to the
old French calls for such a counterweight, and indeed the issue will occupy an important place
in the French presidency during the second half of 2000.
The policy decisions since the launch of the Euro hence would give rise to optimism,
although the real test of social democrtt’s adherence to fairly relaxed money may still be
ahead, namely if the ECB should decide to halt the slide of the Euro by means of high interest
rates. Admittedly, even a return to macroeconomic austerity does not have to spell immediate
disaster for social democrats. It will be difficult for its conservative and liberal predecessors to
credibly position themselves as the better guarantors of employment and the welfare state. Not
only would this require a rejection of their recent policies, it would also involve trying to undo
almost a century of image building in democratic polities, in which they have sought to place
themselves to the right of social democracy. Such reversals may prove feasible only for nonsocial democratic parties that have found themselves in long-term opposition against an
increasingly neo-liberal social democracy. In the present EU this would seem to apply primarily
to the Spanish Conservatives. Despite the warning they received at the European elections of
1999 they may therefore nevertheless succeed in national elections Even though they were
mainly elected to improve the economic and social security of the electorate a failure to do so
would seem unlikely to for the lack of a credible alternative.
28
In the longer run, however, a social democratic EMU fail to address the unsolved
problems of the neo-liberal strategies of the eighties and nineties the political cohesion, which
as Benjamin Cohen (1994) has pointed out, a monetary union requires for its existence may
evaporate (Scharpf 1997: 1). A social democratic zero-sum EMU in which employment can
only be had at the cost of larger income differentiation may benefit those right wing extremist
who campaign on the theme reserving available jobs for nationals. The Austrian FPÖ and the
French Front National, and, have booked significant successes on the basis of election
platforms with clear xenophobic, protectionist and anti EU overtones.
Despite its successes in Austria and France, right-wing extremism however, has failed
to make significant electoral inroads in most European countries. A more serious threat may
emergence from a gradual loss of legitimacy of European governance and the concomitant
willingness to resort to protectionist measures, which may result if the sacrifices in terms of
welfare state cutbacks, reduced job security and increasing earning differential - allegedly
imposed by the imperatives of globalisation and Europeanisation - come to be considered
excessive by a wide range of the electorate. Invoking the pressures of globalisation may have
played a politically useful role for many social democrats in helping to promote necessary
reforms against the reluctance of party members and voters. Yet an overly strong emphasis on
the impotence of politics in the face of international economic pressures may provoke the
reaction of rejecting economic internationalisation, as indeed happened in many cases during
the Great Depression. Especially in those countries in which the institutional set-up does not
allow for a form of ‘competitive corporatism’ successful in improving external competitiveness,
a protectionist response may not be unlikely over the longer run. Moreover, also the problem
of increasing tax competition may eventually provoke such responses.
Admittedly many social democrats see re-regulation at the European level, i.e., a
strengthening of European integration as the appropriate response to a constellation of
regulatory and cost competition between the member states with a zero sum framework. As
the contributions to this chapter have shown, European social democrats have no common
program for economic regulation at EU level. Rather the ongoing high level discussions on
‘progressive governance’ seem to lead to the conclusion that each country should find its own
29
‘third way’ suitable to its own circumstances. Moreover, given wide divergences of levels of
productivity and preferences concerning collective versus individual consumption also within
Europe, harmonisation of labour market and welfare state standards would appear
undesirable. Indeed it is hard to disagree with the argument that those within especially the
social democratic parties of the wealthier EU economies, like e.g., the SPD and PS, who
strongly emphasise the need for harmonisation are engaging in a form of protectionism with
the effect of preventing the less wealthier members from exploiting their comparative
advantage. However, in a world where an appreciate monetary orientation provides growth
impulses, as was the case for example during the fifties, employment no longer needs to be
considered a zero sum game and free markets can be very well compatible with large
differences in welfare state regimes and earning inequalities. In short, macro stimulation may
prevent the inevitable disappointment about the inability to transfer the traditional welfare state
arrangements of north-western Europe to the EU level from promoting protectionist
sentiments.
Finally, longer term absence of sufficient GDP growth may increasingly push social
democracy towards more inegalitarian solutions. Presently the discussion about the degree of
state regulation and income inequality European social democrats should admit’ seems to pit
especially the French views (Parti Socialiste 1999) for a more regulated and less inegalitarian
social democracy against the British views (Blair & Schröder 1999) in which equality is defined
primarily as inclusion (labour market participation) and not income equality. Yet these
frontlines may be misleading. As the experience from prolonged and rapid growth of
employment in the US has demonstrated, low unemployment in the longer run may be the best
remedy against inequality, simply because under longer periods of high employment those
with few skills face more opportunities to gain employment and improve their incomes. 6
6 Freeman & Rodgers (1999) find that the tight labour markets in the USA during the 1990s in
metropolitan areas has especially benefited the employment and income of young male
African Americans whereas the earning of adult men barely changed. Note that many of these
African American males were considered unemployable under slack labour market conditions.
Similarly Hilary Hoynes’ (1999) study of the US labour market concludes that ‘individuals with
lower education levels, nonwhites, and low skill women experience greater cyclical fluctuation
30
Especially if combined with more active labour market policies to upgrade the social and
professional skills of the unemployed, the British labour market with its strong employment
growth hence may eventually provide better chances for lowering equality. Without a recovery
of GDP growth, however, French programs of subsidised low wage unemployment in
community services may prove a more inegalitarian solution to the extent that it provides little
prospect for advancement and little social security protection of those involved in such
projects, while simultaneously shielding a well-protected sector, primarily in public services,
from the pressures of unemployment and welfare state cutbacks. Apparently such a solution
would be easier to practice for socialist parties like the French who historically have had weak
links with industrial labour and draw their main support from middle income professions in the
public sector.
In sum, far from being a threat, EMU has provided European social democracy with a
favourable institutional set-up from which to avoid the main problem that brought down its
post-war model, namely the inability to prevent inflation in tight labour markets. Because the
increased competition resulting from Europeanisation, combined with the resurgence of
negotiated tripartite bargaining in many members countries has reduced the need for
unemployment as a guarantor of price stability, the possibilities of a monetary regime in which
cheap money again comes to play a crucial role in promoting private sector growth have
substantially improved. A return to the monetary policy orientation of the post-war period
combined with much of the deregulation and liberalisation measures of the eighties hence may
be the key to overcoming a zero sum type situation in which mass-unemployment and low
growth threatens to capture European social democracy. Admittedly, also on the bases of low
growth many social democratic parties may be able to defend their present position of
dominance. Yet such successes are more likely to remain politically contested. What trajectory
European social democracy will travel will, as has been the case fore most of its history, the
result of its own political choices.
than high skill men.’
31
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