History's Missed Moment

Why did the greatest failure of laissez-faire capitalism since the Great Depression lead to a turn to the right rather than the left in both Europe and the U.S.?

The epic financial crash of 2007–2008 should have produced a massive political defeat for the conservative ideology whose resurgence began three decades ago. Its signal achievement, liberated finance, did not reward innovation, enhance economic efficiency, or produce broad prosperity. Rather, the result was a speculative bubble followed by a severe crash. Along the way, the super-rich captured a disproportionate share of the economy’s gains, while other incomes stagnated. In the aftermath, ordinary people have suffered large losses of earnings, assets, social protections, and hopes for their children.

By any measure, therefore, 2008 was primed to be a political watershed on a par with 1932. History delivered a profound teachable moment for American progressives and European social democrats. But, to borrow from T.S. Eliot, between the idea and the reality fell the shadow. Three years after the financial dominoes toppled, right-wing ideas are ascendant and right-wing policies reign. Instead of reform and recovery, governing elites are delivering austerity. As the economy keeps sinking, the democratic left is in disarray nearly everywhere. In most Western countries, center-right parties govern and far-right movements are on the march.

The historian A.J.P. Taylor described the revolutionary year 1848—in which abortive liberal democratic revolutions across Europe were all crushed—as a moment when “history reached its turning point and failed to turn.” It would not be an exaggeration to view 2008 as the most stunning missed moment in modern political history.

How could this have happened? If laissez-faire could not be reversed as a practical and intellectual failure after a second massive financial crash on the conservative watch, when can progressives ever expect to rebuild a broad popular constituency for a managed form of capitalism? The explanations cannot just be idiosyncratic or personal—Barack Obama’s conciliatory temperament, Gordon Brown’s dour manner, or Strauss-Kahn’s predatory libido. The patterns are too pervasive. The story has to be deeply structural.

Many Americans look to Europe, long the home of a more social brand of capitalism, as a counterweight to American conservatism. A month of conducting interviews in six European countries, however, persuades me that Europe is afflicted by deep trends common to both sides of the Atlantic, though with instructive variations on the theme. If American liberals and European social democrats are ever to regain political momentum, we need to understand why we don’t have it now.

Fatally Compromised

One key explanation is that supposedly center-left governments were complicit in the financial deregulatory policies that led to the collapse. So when the crash came, the moderate-left parties of Bill Clinton in the U.S., Tony Blair in Britain, Gerhard Schröder in Germany, Wim Kok in the Netherlands, and several others were not a credible alternative. Barack Obama turned out to be more Clintonian than Clinton.

Blair had continued Margaret Thatcher’s policies of making London as hospitable as possible for the bankers whose recklessness would bring on the collapse. Clinton and his aides were, if anything, more responsible for financial deregulation than either president Bush. That legacy lives on in the Wall Street–oriented team advising Obama. Schröder not only destroyed a more stable and regulated industrial/financial system in Germany but sponsored labor-market reforms that weakened unions, undercut wages, and widened inequality. In the Netherlands, Kok promoted a version of labor-market flexibility that led to relentless pressure to cut labor costs and job security and split the constituency of his Dutch Labor Party.

Given this legacy, social-democratic parties from the Baltic to the Balkans have neither the political credibility nor the economic program to be a plausible opposition-in-waiting. Protest has splintered, with far-left parties, Greens, and especially right-wing populists all making gains at the expense of social democrats. Also, over three decades, as left parties mellowed into “center-left” ones, they came to think of themselves as parties of government. When times turned hard, social democrats were the quintessential establishment party that was failing to solve problems.

There are two basic schools of thought on why the left moved toward the center. For some, the Keynesian welfare state hit a wall. By the 1970s, welfare protections had become too generous, taxes too high, bureaucracy too stultifying, labor markets too rigid, and growth too slow. This was, of course, the right’s critique, but many moderate leftists concluded that the neo-liberals, with their call for a bracing dose of market competition, were not entirely wrong.

In fact, the exaggerated story of welfare-state rigidity more nearly described Britain or the Netherlands than flexible Sweden or Denmark. But after the hard-right Reagan-Thatcher interlude in the 1980s, chastened labor and social-democratic parties (except in Socialist Francois Mitterrand’s France) returned to power with a more temperate form of neo-liberalism, both to steal the right’s thunder and to preserve what they could of welfare capitalism.

According to the second school, what occurred was mainly a power shift. In this view, the stagnation of the 1970s was initially the result of the collapse of the stable, pro-growth Bretton Woods monetary system and the OPEC oil-price increase. Though not the fault of social democracy, stagnation and its remedies empowered the right. “The opening up of capital markets gives multinational companies and banks immense leverage to influence policy,” says Ola Pettersson, chief economist of the Swedish Trade Union Confederation. “It’s the politics of blackmail.”

With the turn to laissez faire, a nation with progressive taxes, high wages, economic regulation, and decent social benefits stood to scare off investors and lose market share. Under Mitterrand in the early 1980s, France learned to its chagrin that in a global capital market, democratic socialism in one country couldn’t work; investors fled, stressing the franc. A sobered Mitterrand moved to the center. Other social democrats, such as Schröder in Germany and Blair in Britain, embraced the neo-liberal recipe more deliberately, even ardently. They were rewarded by a political alliance with the banks. In Scandinavia, social-democratic governments in power in the 1990s attempted a suppler blend of market incentives and welfare protections. But everywhere, left parties found themselves with less room to maneuver.

There are elements of truth in both ac-counts. Undeniably, however, neo-liberalism has fed on itself. A little leads inexorably to more. Liberate capital, and you increase its political power. Weaken the state with privatization and deregulation, weaken unions with more “flexible” labor markets, and you not only reap more of a free-market economy, you end up with less civic solidarity and a fragmented polity. You remove the political and institutional counterweights to the power of organized business. In good times and bad, capital rules.

Over the past three decades, some on the center-left convinced themselves that the hegemony of financial capital could coexist with a progressive “supply side” formula of more investment in human capital. That strategy, necessary but not sufficient, is now defunct. It has neither produced enough good jobs nor rebuilt political majorities. It failed either to contain the steady erosion of core social protections or to prevent rapacious bankers from wrecking the economy.

Much of this story has close echoes on our side of the Atlantic, but there are three uniquely European elements: immigration, demographics, and the role of the European Union.

Indigestible Immigrants

On July 22, tolerant Norway suffered an improbable episode of terrorism. A lone gunman slaughtered 69 people at a Labor Party youth camp on the island of Utøya, after setting off a car bomb in downtown Oslo that killed 8 others. At first, Islamist extremists were suspected, but the gunman turned out to be an anti-Islam extremist—a militant former member of Norway’s right-wing Progress Party.

Norway, as it happens, is the sole nation in Europe with a popular and effective left government, led by the Labor Party. The country has a well-regulated financial system, 2.8 percent unemployment (in July 2011), and a budget surplus, and it has largely escaped the global economic crisis. It helps that the place is swimming in North Sea oil.

Yet the Progress Party is Norway’s second-strongest party, with 22.9 percent of the vote in the 2009 election. Nativist parties take similar shares in Denmark (14 percent in 2007), the Netherlands (16 percent in 2010), Finland (19 percent, virtually tied with the Social Democrats, in April 2011), and Austria (28 percent in 2008)—all nations that have been the heartland of European social democracy. In France, which has a runoff system of presidential elections, Marine Le Pen of the far-right National Front could well edge out the Socialist candidate in the first round of next year’s election, just as her father, Jean-Marie Le Pen, squeezed Socialist Lionel Jospin out of the first round in 2002, leaving the entire political mainstream to elect conservative Jacques Chirac in a landslide.

One reason immigration pushes European politics to the right is cultural isolation. Much of Europe’s immigrant and refugee population is less interested in becoming “Europeanized” than most migrants to the U.S. and their offspring are in becoming American. Rather, Europe is a place to earn a living and replicate one’s own cultural community. Native-born Europeans with their own deep cultural traditions tend to reciprocate that sense of otherness. “With our xenophobia, we have a hard time recruiting highly skilled people from nearby European countries, much less scientists and engineers from India or China,” admits Lars Goldschmidt of the Confederation of Danish Industry, “in part because spouses are made to feel so unwelcome.”

Although the U.S. has its own checkered immigrant history, it no longer strikes most Americans as odd to hear someone from an unlikely background speaking accentless American English. To a Dane, however, listening to the children of Somali refugees speak perfect Danish still seems weird, and of course, they often don’t speak perfect Danish, making it harder for immigrants and their children to assimilate and succeed.

A related problem is the impact of immigrants on Europe’s generous welfare state and stressed labor market. Jobless and poorly skilled immigrants are major consumers of services and frequently willing to work for lower wages. The native-born working class bears the brunt. Immigrants settle in their neighborhoods and are seen (rightly or wrongly) as taking the jobs of native citizens, crowding their schools, disrespecting their culture, pushing up their taxes, and raising local crime rates. The economic and political elite, cosseted in safe, charming sections of Amsterdam or Paris, can afford to be more cosmopolitan. A friend living in a fashionably diverse quarter of gentrified East Berlin describes his neighborhood as “G-7 diversity”: just Europeans and North Americans, thank you.

Because social-democratic parties rely on the native working-class vote and are champions of tolerance, they suffer the most from the anti-immigrant backlash. “We lost the working-class voters who are the losers of globalization,” says Tommy Waidelich, the Swedish Social Democratic Party’s chief of economic affairs.

The Assault on Welfare Capitalism

Even without the immigrant influx, slower growth has collided with an aging population and dwindling birthrates, requiring unpopular adjustments in a costly welfare state. High taxes buy less of the good life than they used to. Social Democrats, as prime stewards of a social model of capitalism, face a more skeptical electorate. But while some of the erosion of the welfare state is the natural consequence of demographic trends, much of it is the unnatural result of deliberate and cynical center-right strategies.

The governing conservative parties that dominate Europe today have grown astute at posing as defenders of the welfare state while subtly undermining its foundations. To a visiting American liberal, the degree of privatization and fragmentation in Europe’s once universal welfare state is shocking. The political consequences are far reaching.

Consider Sweden. The Social Democrats, who last governed from 1994 until 2006, creatively introduced measures intended to make the welfare state more flexible and provide citizens greater choice—some of them building on reforms from conservatives. Any group of Swedes, for instance, can organize a local school that competes with the official state school. Many government agencies providing services have to compete with private rivals to win contracts. The pension and unemployment systems have enhanced elements of choice. Many of these reforms made sense, both to keep the bureaucracy on its toes and as an inoculation against further privatization.

But when a center-right coalition narrowly won power in the 2006 election, and kept it in 2010, the new government twisted the left’s reforms to weaken Sweden’s ingeniously efficient full-employment system and undermine the trade unions that form the core of the Social-Democratic constituency.

In the old Swedish model, collaborative bargaining between unions and employers, combined with substantial state outlays on retraining and job creation, allowed Sweden to remain at full employment without overheating the economy or causing inflation. Unions kept wage gains in line with productivity growth so that Sweden would remain competitive. The formula famously combined an egalitarian “solidarity wage policy”—raises for the lowest paid got first claim—with an “active labor-market policy”—lifelong training to increase Sweden’s productivity over time and soak up idle workers during downturns.

This highly successful model, regularly and consensually refined, was the labor movement’s crown jewel. Its architects were brilliant, union-affiliated economists like Rudolf Meidner, Gosta Rehn, and Clas-Erik Odhner, household names to ordinary Swedes. Nearly every Swedish worker was a member of a union. The unions were key custodians of the model and the soul of the Social Democratic Party, which was the normal party of government for most years between 1932 and 2006.

In just five years, the conservative government has demolished much of this model, drastically cutting outlays on active labor-market policy. It has raised the cost of unemployment insurance and reduced benefits, causing fewer workers to opt for coverage. The government has also made it less attractive to get unemployment coverage through union membership, as a strategy of weakening unions.

According to Pettersson of the Swedish Trade Union Confederation, “The government has found traction with the idea that lower taxes will produce increased employment. But theirs is the low-wage, low -- productivity road to job creation. Today, when you see a TV report on the government’s labor-market policy, you see people working on their CVs instead of getting training for good jobs.”

The government has also changed hiring rules so that corporations can try out new workers at lower wages for a time period of 6 months (though in some cases employers have extended it to 24) without giving them regular employment. These young workers, marginally attached to the labor force, are harder for unions to reach. “The right sincerely believes this will cut unemployment,” Pettersson says, “but these cumulative policy shifts undermine both the high-wage, high-equality, high-productivity Swedish economic model and the Social Democrats’ political support.”

Today, it isn’t just local citizens who can establish what an American might call a charter school. The players include for-profit, multinational corporations. Many hospitals have also been privatized. As service providers cease to be public institutions, their employees are less likely to be members of a union.

Joakim Palme, who heads a leading policy research institute and teaches political science at Uppsala University (and is the son of the revered, murdered Prime Minister Olof Palme), says, “Social Democrats led the way in introducing more competition in the public sector, but you have to be very careful about which sectors and what rules, because it’s a slippery slope.”

Waidelich, the Social Democrats’ economic leader, told me, “The shift has gone too far. Originally, school choice in Sweden was for local people who had a different idea of pedagogy. Now, under the conservatives, you have big multinational companies based in tax havens, not even paying taxes in Sweden, running tax-supported schools. In Sweden, 40 percent now go to alternative schools. The schools run by corporations hire younger teachers and work them harder. The public school takes the pupils whom the others don’t want or who don’t have parents with the time to contribute.”

Sweden, once a destination for worldwide social-democratic pilgrimages, increasingly looks like the Heritage Foundation’s idea of utopia.

You might think all these incursions would cause a citizen backlash. But the government has softened the blow by cutting taxes. “The Conservative Party had been the party of wealth,” says Allan Larsson, the former Social Democratic finance minister who also headed Sweden’s labor-market system in its glory days. “In 2006, the right shifted their story. Now they say, ‘We are the party for people who work for a living, not for those who rely mainly on benefits.’”

In the most recent election, the center-right four-party coalition reduced the once dominant Social Democratic Party to just 30.7 percent of the vote, its worst performance since the election of 1920. “I am afraid,” says another former Social Democratic cabinet minister, “that a lot of the structural damage to our model and political damage to our party is irreversible.”

The conservative strategy, says Joakim Palme, boils down to four elements: Reduce and fragment the welfare state while preserving core benefits. Give tax cuts to the middle class. Lower the reservation wage (the lowest wage that will attract workers), but subsidize it with tax credits. Dilute active labor-market policies. Add drastic financial deregulation, and this describes the right’s formula throughout the continent. The view from the Netherlands, or Denmark, or Germany, allowing for national variations, is remarkably similar. The right’s common strategy of embracing the welfare state while undermining its foundations seems to work nearly everywhere—and the center-left laid some of the groundwork.

Germany, for example, wins praise for its ingenious system of subsidized short working time (kurzarbeit) to reduce unemployment. Employees cut their hours, but the losses are shared between the state and the workers, who typically keep around 85 percent of their usual take-home pay. The company gets to retain its skilled workforce rather than helplessly watch it dissipate due to layoffs in a downturn. German unemployment actually dropped between 2007 and 2010.

This innovation, however, is the work of a center-right government, the Christian Democratic Union under Angela Merkel. And kurzarbeit is part of a suite of labor policies—of which Social Democrats were prime architects—most of which have weakened unions, undercut wages, and splintered the welfare state.

In the late 1990s and early 2000s, Germany was governed by a coalition of Social Democrats (the SPD) and Greens led by Chancellor Schröder. Reunification had imposed huge costs, unemployment was rising, and neo-liberal panaceas were in the air. Schröder made the fateful decision to liberalize capital and labor markets.

Postwar West Germany used a “corporatist” model of capitalism, otherwise known as Deutschland, A.G. (Germany, Incorporated). Banks owned huge blocks of corporate stock that rarely traded, so corporations enjoyed cheap, patient capital and did not have to face shareholder pressures for high quarterly returns. Unions participated in corporate governance through works councils and well-choreographed collective bargaining. There was generous investment in worker training.

But by the late 1990s, shareholder rather than stakeholder capitalism was in fashion. So the Schröder government changed tax policy to discourage bank dominance of the corporate economy and make the shareholder king. Pressure for short-term high returns increased. Schröder drastically reduced unemployment benefits and compelled workers to take available, low-wage jobs or lose welfare benefits entirely. Industry-wide collective bargaining declined by nearly 30 percent in just a decade. Union membership dropped by almost half. Wages lagged behind productivity.

In the neighboring Netherlands, Labor Prime Minister Wim Kok brokered a grand bargain in 1999. Employers got more discretion to hire temporary and part-time workers, but these workers were supposed to be accorded the same protections as those with regular contracts. Unemployment fell. “He was hailed as a miracle worker,” says economist Paul de Beer of the University of Amsterdam, “but it had a lot more to do with North Sea oil and favorable macroeconomic trends—higher worldwide growth, low interest rates—than with Kok’s reforms.”

In the meantime, “flexicurity,” a term coined by a Dutch sociologist in the 1990s to describe the new Dutch model, became a buzzword much promoted by the bureaucrats of Brussels. Workers would trade job security for employment security. Their protections would be social rather than connected to a given job. The state would invest more in worker training. Employers would get more freedom to hire and fire. There was nothing new or centrist about this idea; the Swedes had been doing it well since the 1960s, under social-democratic auspices. But as events played out, Dutch flexicurity delivered more on the flexibility than the security.

The deal gave new powers to employment agencies and made it easier for corporations to keep workers in a long-term “temporary” classification. Fully 48 percent of all workers are now part time, and it has become progressively harder for part-time workers to get full-time jobs.

The changes in labor law have interacted with privatization. Even the Dutch post office has been privatized. (An EU competition directive requires that private-sector contractors may bid to provide public services.) Self-employed messengers under contract to the successor postal companies now deliver the mail at minimum wages—or less.

The overall consequence of these shifts is declining security and declining earnings. Among young Dutch workers, fully 61 percent have low-wage jobs. Meanwhile, the center-right government, which took power in 2002 with Labor as a junior partner since 2006, has acted to splinter other welfare-state programs. “Health insurance used to be mandatory and fixed,” de Beer says. “Now everyone has to insure themselves, there are many different kinds of policies, and companies engage in cherry-picking.” This story is all too American. What’s surprising is to find it in the Netherlands, much less as the partial handiwork of a labor party.

The Brussels Paradox

There was a moment when European progressives looked to the emergent EU as a bastion of social democracy against the Anglo-Saxon forces of rampant free markets. But that moment, which peaked under the European Commission presidency of the French Socialist Jacques Delors (1985–1995), has passed.

The EU, after all, has free-market roots. Its antecedents, the European Coal and Steel Community, established in 1951, and the original Common Market, started in 1957, were all about reducing barriers to trade. As the European project evolved from a customs union into a political confederation, many on the moderate left imagined that trans-European social policy would serve as a counterweight to economic liberalization within Europe and worldwide. However, this hope proved illusory on several counts.

First, while the creation of a European single market in 1993 increased the power of EU commissioners in Brussels, the basic EU law gave priority to economic liberalization. Under the Maastricht Treaty of 1992, free movement of capital, goods, services, and persons is fundamental constitutional doctrine. These basic doctrines, in turn, are carried out by directives issued from Brussels. While orders by the Brussels bureaucracy have strengthened a mixed form of capitalism in such areas as antitrust, the environment, and the rights of women, on balance they have weakened protections in the core areas of finance and labor.

For example, since 1993 workers have generally been free to take jobs anywhere within the EU. Much of this labor migration, however, is orchestrated by large corporations. So the European Commission in 1996 issued a directive on workers “posted” from one country to another. On paper, the rules seem balanced. The company gets to deploy workers as it pleases; the foreign contract workers get the same minimum rights as the locals. In practice, however, foreign workers often end up at the bottom of the local labor market, unprotected by either unions or regulators. In addition, a contractor need pay only the (usually low) social-security contributions of the worker’s country of origin—giving a further cost advantage to the contract worker over local workers. In France, the gap is estimated at around 25 percent. The whole process, though seemingly regulated, drags down prevailing wages and contributes to a more laissez-faire labor market.

In three notorious cases, the European High Court over the past decade held that a ferry line based in Finland could fire its Finnish workers in order to hire cheaper Estonian workers; that a German state could not impose minimum-pay standards on the Polish subcontractor of a German contractor; and that Swedish unions could not compel a Latvian company to bargain collectively on a contract for work in Sweden.

These rulings not only allow transnational business to undermine national labor standards. They weaken European labor solidarity by amplifying divisions in the self-interest of national labor movements.

By contrast, consider one of the directives intended to strengthen regulation of capital. Thanks to the tireless prodding of Poul Nyrup Rasmussen, the former Social Democratic prime minister of Denmark, the European Commission recently issued a directive on the governance of hedge funds and other lightly regulated financiers. Hedge funds and private-equity companies, which have neither the reserve nor the reporting requirements of banks, have been faulted for several kinds of abuses. They are fond of acquiring operating companies and then stripping their assets for quick gain. Hedge funds are also the prime speculators betting against sovereign debt, often using “naked” credit-default swaps, and were big bettors in the American International Group and subprime debacles. Generally, their operations have been totally opaque.

It was a breakthrough that this directive was issued at all. But while the directive was being developed, lobbyists for industry overwhelmed reformers. The final measure, published in July 2011, is full of loopholes. You can evade most of its provisions by incorporating offshore. The hedge-fund and private-equity business model will continue pretty much as before. If labor solidarity is shaky, capital solidarity is relentless.

The post-Maastricht EU weakened social democracy in a second respect. Power is divided among national governments, the European Commission in Brussels, the European Parliament, the European Central Bank, the European Court of Justice, and several quasi-autonomous regulatory agencies. The winner? Laissez-faire capitalism. Europe, once the home of nation-states strong enough to regulate capitalism, now has something more reminiscent of the U.S. Articles of Confederation.

In the U.S., at the peak of the financial crisis in September 2008, you could put the Federal Reserve chair, the Treasury secretary, and the legislative leadership in a small room and hammer out a rescue package. It turned out to be the wrong package, but that’s a story for another day. Together, the Fed and the Treasury have regulatory power over the banks as well as the power to print money and issue bonds. The 2008 program, if misguided, was at least internally consistent in its use of fiscal, monetary, and regulatory policy.

In Europe, however, with a weakened governmental apparatus, private finance retains that much more power to block structural reform. For instance, though the Greek mess had a fairly straightforward remedy of partial debt relief and longer-term repayment, the divided EU institutions dithered for over a year as Greece sank into deeper recession. Even if by some miracle a majority of social-democratic national governments won power, they would be stymied by the EU’s institutional quagmire. Where Mitterrand, trying to go it alone three decades ago, had “only” the power of global capital to block his program, a modern successor would also have to reckon with Brussels, at once a bureaucratic force for neo-liberal contagion and a dysfunctional obstacle to structural reform.

Further, expansion of the EU has created something close to a permanent center-right majority. Of the 27 current member states, most of the nine former Soviet satellites now in the EU have conservative governments. Their ideal successor to Marx is not Mitterrand but Milton Friedman. The new member states generally see their comparative advantage in offering Western European multinationals cheap labor forces, low taxes, and light regulation.

The EU, finally, is increasingly seen by ordinary Europeans as an elite project. In a time of economic troubles, the popular backlash against an ineffectual but meddlesome Brussels is not unlike the backlash against Washington. A general mood of anti -- government sentiment is a poor climate in which to rebuild social democracy.

On reflection, it is not surprising that a far-flung confederation should result in weaker government with diminished capacity to regulate transnational capitalism. In 1939, the godfather of modern libertarianism, Friedrich Hayek, a proponent of European federation, predicted that with a federation, “certain economic powers, which are now generally wielded by the national state, could be exercised neither by the federation nor by the individual states.” Hayek should be thrilled with the result.

Politics Is Teaching

An enfeebled movement produces feeble leaders, and weak leaders don’t rebuild movements. Today, it is hard to think of a center-left president or prime minister who is any kind of public hero.

One of the 20th century’s greatest social-democratic leaders, Olof Palme, was fond of saying “Politik är att tjata.” The phrase can be literally rendered as “Politics is pestering,” but with more positive connotations. “Tjata” is a word Swedes use to describe encouraging their kids to finish homework. Palme meant it as hectoring the citizenry to rise to its best and legislators to produce effective and creative results. According to Palme’s former colleague Allan Larsson, you could loosely translate Palme’s dictum as Politics is teaching. Though the current crisis could be a teachable moment, we don’t see much creative teaching from the democratic left.

Are there any bright spots? One can take some hope from Denmark. There, the center -- right government, in power since 2001, has tried many of the same gambits as its Swedish counterparts—the fragmentation of once comprehensive services, the weakening of the active labor-market system, the use of tax cuts and privatization to split the upper middle class from the coalition that supports the welfare state. But more bureaucrats are now required to supervise private vendors of social services, and the new labor-market system has deteriorated into a paper chase. The government has internal divisions and has lost popularity. A left coalition seems poised to win this fall’s election.

The Danish version of flexicurity has been much more universal and politically popular than the Dutch one. A series of reforms, by the last Social Democratic government under Poul Nyrup Rasmussen in the 1990s, increased pressure on unemployed workers to find jobs but with enhanced social supports. There was no pressure to pursue low-wage work. That last Social Democratic era, when unemployment fell and earnings rose, is remembered as a time of broad prosperity.

The current Social Democratic leader, Helle Thorning-Schmidt, told me that she thought a lot of the damage done to the model could be reversed but added that “the fiscal room to maneuver is very narrow.” Her party promises a new social bargain that would raise taxes on wealthy Danes and banks, increase public investment, lengthen the normal workweek (reportedly by one hour), repair the damage to the labor-market system, and redouble investment in education and training. These small steps in the right direction are constrained by Europe’s wider recession but in context are considered bold.

Elsewhere, the right is wearing out its welcome. In Italy, Silvio Berlusconi’s brand of near fascism has run its course. David Cameron’s right-wing British coalition government has lurched from crisis to crisis. Merkel is effective but not popular.

A failed right, however, doesn’t mean a successful left. Even with several center-left governments, if European social democracy continues on its present path, these gains would neither solve the economic crisis nor restore the left’s broad credibility. Impromptu events loosely connected to economic distress, like the August riots that broke out in Britain, or the capture of Greek anxiety by far-left anarchist street protests, demonstrate what occurs when left parties cease to be effective carriers of pocketbook frustrations and their remedies. Protest turns apolitical or ugly, or worse.

In my interviews with progressive European leaders and scholars, I encountered few optimists but two different kinds of pessimists. The first kind contends that because of demographic, fiscal, and economic trends, the social-democratic welfare state that thrived during the unique circumstances of the third quarter of the 20th century is doomed. That brand of pessimism is excessive. The Scandinavians have demonstrated that the welfare state can be continuously refined and combined with an efficiently productive economy. In Sweden, conservatives have outmaneuvered social democrats for now, but the Scandinavian economic model broadly survives. To make it work, though, you have to contain private finance.

The second kind of pessimist concludes that a different road exists but doubts that today’s democratic left has the political nerve to follow it. That sort of pessimism can be fatal.

One key difference between Europe and the U.S.: Because of Europe’s multiparty parliamentary systems, center-right coalitions govern while the far-right stands outside. In the U.S., with its presidential two-party system, the far-right has now taken over one of the two major parties. This reality, combined with a constitutional system that facilitates blockage, prevents government from addressing a dire economic emergency and reinforces citizen disaffection with government in general, further energizing the far right.

Another important difference between the American and European versions of the hegemony of the right is that the Europeans have several legitimate alibis for the left’s weakness—the perversity of the EU, the fiscal pressures of an older population, and the greater political and cultural distance between Europe and its immigrants. There is simply no European equivalent of California, much less of Los Angeles—places where recent immigrant populations are key elements of an effective local progressive coalition.

Both the U.S. and Europe now have constitutional systems biased against government activism. Of these, the European version is the more intractable. There were good reasons for progressives to cheer on the EU project, not the least of which were anchoring a democratic Germany within a larger democratic body and overcoming the economic disadvantage of separate small economies and currencies. Europe’s social democrats, however, were outplayed in the neo-liberal architecture of the EU and its multiple institutions.

By contrast, the impact of the multiple veto points deliberately built into the American constitutional system can be overstated. None of it stopped Lyndon Johnson or Franklin Roosevelt. Politics is always a blend of the structural and the fortuitous. The difference between 1933 and 2008 was partly in the economic circumstances that gave FDR a more dire crisis to combat. But it was also our good luck to get a leader with the jaunty fortitude of Roosevelt in the last great crisis of capitalism, and our bad luck to draw Obama today.

In America, radical reform is losing out because a Democratic president, captured by financial elites, failed to seize the moment. In Europe, reform is blocked because most social democrats, decades ago, ceased to mount a strong challenge to ideological and bureaucratic currents that were ultimately toxic to their movement. Here is where Europe and America converge: Though much can be blamed on our constitutional structures, today our politics is more dysfunctional than our institutions. On both sides of the Atlantic, the cure is a more robust democratic left.

To repair managed capitalism and to redeem its own credibility, the progressive left needs to abandon its 30-year dalliance with neo-liberalism and to embrace far stronger remedies for the current economic crisis. They include a re-regulation of capital to abolish the purely speculative part of the financial economy and an abandonment of the premise that the current deflation is cured by belt-tightening. These things go together, of course, because it is the rentier class that is demanding austerity.

The left does not have the power to implement these reforms anytime soon, but it does have the power to teach. In the near term, left parties will be mostly in opposition. They should behave like an opposition—and they may regain the credibility to eventually return to power.

(American Prospect - September 2011)

Robert Kuttner

Robert Kuttner is co-founder and co-editor of The American Prospect, as well as a distinguished senior fellow of the think tank Demos. He is the author of Obama's Challenge and other books.