Europe: social democracy’s Faustian pact with global finance unravels
This paper focuses on how the global economic crisis unfolded in Europe, where a toxic mix of financial liberalization, highly-leverage banks, a poorly-planned euro and Germany’s years of structural adjustment created a deeply unbalanced and highly indebted European economy, that was brought into sharp focus as Wall Street banks collapsed. The result was the reversal of Europe's economic integration and a state of permanent crisis that continues to this day.
British Prime Minister Margaret Thatcher is the figure most identified with the advent of neoliberal policies in Europe. After her, however, it has been figures from Europe’s key social democratic parties that have played the main roles in promoting neoliberalism: Tony Blair and Gordon Brown in the financialization of the British economy, Francois Mitterand in pushing the Maastricht Treaty, the free-market oriented agreement that led to the establishment of the euro, and Gerhard Schröder in imposing the Hartz reforms that led to Germany’s pushing its neighbours into crisis, and eventually financial vassalage.
Blair and Brown, Mitterand and Schröder made their compromise with neoliberalism with the best of intentions, which was to achieve economic growth so that some of it could be siphoned off to serve as social expenditures for the working class. That proved to be a tragic illusion. True, there appeared to be a few good years in the 1990s. But, ultimately, the Faustian bargain led in each case to a severe crisis that outweighed whatever economic benefits they had managed to bring about.
Thus one of main casualties of the financial crisis in Europe has been social democracy. The collapse of financialization in Britain led to Labour’s irreversible crisis even before the Brexit debacle. One might say that the eurozone mess that has dragged so many countries deeper into permanent stagnation, while subjugating them to Berlin, has led to the increasing irrelevance of social democratic parties as vehicles for people’s aspirations for economic emancipation. The unravelling of its historic compromise with neoliberalism and finance capital, to pirate the words of the Italian Communist leader Enrico Berlinguer in a different context, has left social democracy with little moral capital.
Varoufakis, expresses social democracy’s crisis most eloquently, and it is worth quoting him in full:
‘With paper profits mounting, European social democrats and American democrats were lured into a Faustian bargain with the bankers of Wall Street, the City of London, Frankfurt and Paris, who were only too pleased to let reformist politicians take a small cut of the loot as long as the politicians consented to the complete deregulation of financial market[s] … Bankers were unshackled and centre-left politicians no longer had to wrestle the captains of industry to fund their social programmes. Financiers had only to feign displeasure at handing over some crumbs from their substantial table for the politicians to acquiesce in the logic and the ethics of financialization, suspend their critical attitude to capitalism and believe deeply that the financial sector knows best how to regulate itself … And so, when in 2008 the vast pyramids of financial capital came crashing down, Europe’s social democrats did not have the mental tools or the moral values with which to combat the bankers or to subject the collapsing system to critical scrutiny … Lacking the ethical, intellectual and financial weapons that they and their predecessors had willingly retired or refused to create some years before … Europe’s social democrats were ready to fall. Ready to retreat. To bow their heads to the bankers’ demands for bailouts to be purchased with self-defeating austerity for the weakest. To shut their eyes to the transfer of the costs of the crisis from those responsible for it to the majority of citizens, Germans and Greeks alike, the very people that social democrats were supposed to represent.’
Varoufakis sadly concludes, ‘European social democracy went to ground, leaving the way open to racist ultra-rightist thugs all too happy to act as the protectors of the weak – as long as the latter had the right blood, skin colour and prejudices.’ Except for the part about the thugs – at least not yet – the parallel to the US situation with the triumph of Donald Trump is all too obvious.
This is the second part of a broader study on global finance, conducted under the auspices of the Transnational Institute (TNI) and the Center for Southeast Asian Studies (CSEAS), Kyoto University. The previous paper focused on the dynamics of the United States’ economy during the current global economic crisis. Future papers will examine China's role and also explore possibilities for an alternative global financial architecture.