Continental Drift

I am on the road in Europe looking for the global opposition party. For three decades, the global governing party has imposed its program of market fundamentalism: Dismantle all barriers to flows of goods, services, and money. Deregulate and privatize the economy. Let bankers, brokers, and their hedge-fund clients go hog-wild. Keep cutting wages, retirement income, and other social protections in the name of competitiveness.

As former Prime Minister Margaret Thatcher of Britain famously declared, "There is no alternative." Even in Europe, there seem to be few options but to go with the flow—and little political will to channel the flow for the greater public good, as center-left governments once did.

The results of this 30-year power shift toward global finance are now in. The record is modest economic growth on average, but with a drastic worsening of economic insecurity and inequality; a huge shift of wealth and power to global business; and degradation of the planet. Above all, the global unleashing of private finance has narrowed the role for national policy, undermining both the program and the appeal of left parties.

But there may be another path, another politics, on the horizon. For the excesses of deregulation have also triggered a severe financial crisis that no serious person defends. Meanwhile, the economic security of ordinary people keeps eroding. So … where is the protest? Where is the swing back to a more managed and balanced form of capitalism? Where is social democratic Europe? Where is the Global Opposition Party?


Maybe it's in France. Whether the president is nominally a socialist like François Mitterrand or a conservative like Nicolas Sarkozy, the French don't like letting markets run riot. Ordinary French citizens may resent their bureaucrats, but they still look respectfully to l'etat for protection. And well-financed public services in France remain excellent.

The French have had one modest banking calamity. A rogue trader named Jérôme Kerviel at Société Générale kept doubling down on bets and burned through $7.6 billion before he was exposed. However, this scandal was a one-off. The French have no sub-prime mess, because it is illegal for banks to foist deceptive loans on borrowers and because there are no unregulated storefront mortgage companies.

I interviewed more than a dozen senior banking and regulatory officials in Paris, most self-described conservatives, and they expressed a unanimity of horror at deregulation à l'Americaine. "I just can't believe that our American friends let this happen," said a senior official at a French government agency. "It was insane, and we will all suffer the consequences."

However, that doesn't mean France is the harbinger of a new progressive era. The French left failed to elect Ségolène Royal last year not just because Sarkozy was the better politician but because the left could not agree on how to make the French economy more competitive while simultaneously modernizing protections of the welfare state. Those who like the current system don't want to change it; those who don't benefit see little reason to support it. The blockage of domestic reform is seen as a permanent French condition.

Sarkozy is now monumentally unpopular at home, but as the incoming rotating president of the EU starting in July, he pledges to "moralize capitalism" on a larger stage. He proposes to tax exorbitant executive pay and to promote financial regulation at the EU level, including of bond-rating agencies. But France is just one country on a fragmented continent, most of whose leaders are content with milder approaches to address excesses. Even France's close economic ally, the Federal Republic of Germany, is drifting closer to the Anglo-Saxon camp.


At first glance, Germany is having the last laugh. Where Britain is facing a recession caused by its own mortgage crisis and collapsing housing prices, Germany, despite the high Euro, is enjoying an export boom. It has the world's largest export surplus relative to gross domestic product, larger even than China's. That's because the Germans still make things, thanks to a tradition of patient capital and well-treated and trained workers. "We need a strong and competitive industrial base in order to have a strong service economy," says Günter Verheugen, the German vice president of the EU. And while Chancellor Angela Merkel is a conservative, she is not a Maggie Thatcher type. Rather, Merkel is the sort of paternalist conservative who invented the social market economy, as Germans term it, during the postwar boom.

However, though Germany still has remnants of a stronger welfare state, it has substantially imported the neo-liberal formula. Once, German enterprises were protected from speculative demands for fast returns by long-term bank financing with low-interest costs and by the strong role of unions on corporate supervisory boards and works counsels. But after 1998, the Social Democratic–Green coalition government of Gerhard Schröder concluded that the Anglo-Saxon way would produce more dynamism. "There is no left or right," he declared, "only the future or the past." Government changed tax laws to favor shareholders over banks and embraced "maximizing shareholder value" as a national goal. German banks began emulating their British counterparts, looking for quick returns and fat fees.

In 2003, the law was changed to make hedge funds welcome. When private-equity firms began moving to take over German companies, many Germans saw a threat to their competitive model -- a widely praised system of stable, innovative enterprises earning normal but not exorbitant profits and rewarding highly productive employees rather than stripping company assets. In 2005, the party chairman and labor minister, Franz Münterfering, famously termed private-equity firms "locusts." But despite complaints, the German government has not acted to slow down the financialization of its economy.

Schröder's government also bought the neo-liberal idea that Germany was suffering high unemployment because of "rigid" labor markets. (The more important reality, says Andreas Botsch, chief economist of the German labor federation, the DGB, is that the Federal Republic was suffering from unprecedented fiscal costs of subsidizing former East Germany and from sluggish domestic demand induced by wage cuts.) Changes in labor law enacted in 2003 and 2004 pushed millions of unemployed or retired Germans into the low-wage job market, reducing labor bargaining power across the board. Some Germans on welfare got modest net income improvements. But according to a new study by the Russell Sage Foundation, once-egalitarian Germany now has income inequality approaching U.S. levels.

German firms remain highly competitive today, mainly because wages have been cut to accommodate higher corporate profits. To the extent that German industry still finds money to invest in employees, much of the credit goes to pushback from the unions.

In 2005, former Finance Minister Oscar Lafontaine broke away to form a new Linkspartei (Left Party), made up of dissident social democrats, trade unionists, and former Communists. His party quickly captured enough voter support to meet the 5 percent threshold required to win seats in parliament. Today, Social Democrats, Greens, and Linkspartei deputies together have a majority in the Bundestag and in principle could form a government. But so great is their rage at Lafontaine's defection that Social Democratic leaders chose instead to be junior coalition partners with Merkel's Christian Democrats. So while there is a German progressive majority-in-waiting, it won't govern anytime soon.


Economically, the German labor policies epitomize a dilemma that afflicts much of Europe, often termed a "society of insiders and outsiders." Core workers in the industrial economy and the public sector still enjoy job security, good social benefits, and representation by unions. But the core is dwindling. Decent protections are not being extended to the fringe -- younger workers, unorganized ones, immigrants, many women, part-time and temporary workers, and much of the new service sector. Though the labor movement is belatedly doing more organizing, the unions and social democratic parties have been too willing to accept a two-tier society as the price of protecting their most loyal constituents. This strategy, notes Bruno Palier, a prominent French political scientist, is a form of slow suicide.

The insider-outsider problem is severe in France, Germany, the Netherlands, and Italy (where the left collapsed in the 2008 election). It's more manageable in Scandinavia, where national bargains still deliver effective labor-market policies. These "flexicurity" policies give employers greater latitude to hire and fire workers in exchange for increased social protections, strong collective-bargaining rights, and subsidies to retrain and re-employ the displaced. The model is under assault from deregulated global finance seeking fast returns, sometimes at the expense of investment in technologies and workers. But for now, anyway, Scandinavia is still committed to a society of no outsiders, and the model is mostly holding.

Elsewhere, however, the insider-outsider problem not only widens inequality. It stunts the reach of left parties and alternative governing philosophies. When marginal workers most harmed by deregulation are offered little, then the political project of protecting all citizens from the ravages of laissez-faire becomes a fantasy. As recently as 1999, the center-left governed 13 of the 15 member states of what was then the EU. But since left parties did not deliver much, center-right governments have come to power nearly everywhere on the continent save Iberia, Austria, Norway, and Finland.

Here in the Netherlands, a much weakened Dutch Labor Party that governed effectively in the 1990s is now a shriveled junior coalition partner with the Christian Democrats. The two fastest growing parties are a populist anti-immigrant party on the right and a radically socialist one on the left. In a grand bargain brokered in the 1990s, the Dutch version of flexicurity liberated companies to hire temps, maintaining social protections but at a lower level. At the same time, it extended standard social protections to part-time work, which many Dutch women experience as a net gain. But the bargain is not staying put and industry is now pressing for easier worker-dismissal laws.

Despite reduced unemployment, most of the net new jobs created turned out to be relatively low-wage ones—reinforcing the sense of a full welfare state only for some. The Dutch Labor Party president, Wouter Bos, now the finance minister, told a Social Democratic conference that I attended in late May, "We can't do much to help people, but at least we can show more empathy." This political box is not just the result of center-left myopia but the consequence of the much narrowed policy space caused by the unleashing of global finance -- though center-left parties bear no small responsibility for colluding in that unleashing.


Fifteen years ago, the European Union seemed the prime ideological counterweight to American-style capitalism. The European Commission president was a farsighted French modernizer, the socialist Jacques Delors. The EU ventured bold plans to build a unified economic market and a common currency, complemented by a social charter, to renew managed capitalism on a continental scale. But Delors, who served from 1985 to 1995, ended up building half a bridge. The social dimension never attained equal status with the core EU doctrines of free movement of capital, persons, services, and goods. I paid a call of homage on Delors, still vigorous at 83. He looks back on his tenure with wistful regret at what he left unfinished. "I succeeded in making a European monetary policy," he told me, "but not European social or economic policy."

Today, control of fiscal policy (government taxing and spending, and the use of surpluses or deficits) is divided among the European Union's 27 member governments, while the EU's rules severely constrain government borrowing. Money policy is now the province of the independent European Central Bank, but the ECB keeps interest rates high and the Euro dear. European progressives point out that the ECB's needlessly tight money policy strangles Europe's growth and leaves European social protections to take the blame.

European regulatory policy is a patchwork. Where the American Federal Reserve can cut deals like the bailout of Bear Stearns that presumably include greater surveillance over the acquiring bank, in this case JP Morgan Chase, the European Central Bank has no such regulatory role. Banking and securities regulation, meanwhile, remain mostly the province of the member nations, complicated by EU directives. Social policy -- on workers' rights, wage standards, pensions, health insurance, the environment -- is largely the responsibility of the 27 member governments but is constrained by EU policies. So even if there were greater political will for a more managed form of capitalism, Europe is institutionally splintered.

Europe has managed to back itself into a quite American dilemma. The U.S. Constitution was intended to make government activism very difficult. By contrast, Europe historically has had parliamentary systems. When a left party won a governing majority, it could enact its program. Thus, in the late 1940s the British Labour government of Clement Attlee could push through socialized medicine despite the fierce opposition of business elites, just as the Mitterrand government of the 1980s could nationalize French banks.

Now, however, the European constitution is looking more American. It has more fragmentation, more federalism, and more centers of veto power. Britain, of which more shortly, has used its influence in Brussels to block EU social legislation. Since it takes a strong state to deliver policies to balance powerful business elites, the EU has become a net conservative force.

Indeed, Brussels today is often more in the role of Trojan Horse for laissez-faire than bastion of managed capitalism. With national center-right governments now dominant, most commissioners of the EU are less interested in advancing social counterweights than in accelerating free capital movements. Among the most fervent are the British, which is all the more galling since they come from a nominally center-left government, New Labour. In addition, Brussels keeps pressuring member states to privatize public assets like the German state-owned banks, which have contributed to the non-speculative financing of the industrial economy.

This conservatism is compounded by the new member states from Eastern Europe, where communism left voters skeptical of social democrats as well as of communists. In their eagerness to attract Western capital, the center-right governments of Eastern Europe have adopted policies of low taxes, little regulation, and scant social protections. This in turn puts pressure on the traditional welfare states of Western Europe to lower their own taxes, reduce protections, and cut wages lest they lose market share and jobs. With the requirement of super-majorities to make major EU policies, the conservative Eastern European bloc in Brussels contributes to a center-right lock on power.

Even more destructive is the interaction between weak social protections in the new member states and the EU's fundamental doctrine of free movement of capital, goods, services, and people. In 2004, an EU commissioner, Frits Bolkestein, issued a draft directive that gave employers in member nations the right to export their lower labor standards along with their migrant workers. Had Bolkestein prevailed, Poles working on construction projects in Germany would have been subject to Polish rather than German labor law. A fierce counteroffensive by the unions and social democrats limited the reach of the directive. But the challenge to labor standards is Hydra-headed. No sooner was that threat resisted than the European Court of Justice, in three recent cases, achieved by judicial fiat much of what Bolkestein failed to get legislatively.

One decision allowed a company based in Estonia to "re-flag" a Baltic ferry line that employed Finns, and reduce wages to Estonian levels. A second permitted a Latvian construction company to bring Latvian workers into Sweden. The company was required to meet statutory wage minimums, but the court held that it could lawfully reject collective-bargaining demands of Swedish unions. A third case, originating in Germany, denied local governments the right to set wage standards in government contracting. Oddly, the "global" threat to the EU model is less the distant undertow of China than the low social and regulatory standards of its own new members … and one of its old ones.


In 1997, Tony Blair wagered that an entente with Britain's financial elite would make New Labour Britain's normal governing party. The Blair project has combined Thatcher's financial policy of deregulating and privatizing with some modest social reforms aimed at reducing poverty, investing more in children, and modernizing the National Health Service. By 1997, Thatcher's legacy of deregulation of capital had already made London Europe's most important financial center. In reinforcing that role, Blair was willing to anchor the entire British economy on a financial sector that was becoming increasingly speculative. But as the credit crisis reduces the exorbitant income of the financial sector, the British economic miracle is poised to go into reverse.

Blair's repositioning did not grow out of Labour Party deliberations. It was the work of a small cabal. After Blair won his landslide victory in 1997, he worked to cripple any party Parliament members who were not New Labour loyalists, co-opting some and isolating others. This capture of the Labour Party was so complete that today no organized faction to Blair's is left, only a few brave individuals. The veteran Labour Member of Parliament, Frank Field, recently mounted a backbench revolt to prevent Prime Minister Gordon Brown from further shifting the tax load from the rich onto the poor; and John McFall, the able Scot who heads the House of Commons Treasury Select Committee, has exposed excesses of British deregulation. But to a far greater degree than in the Democratic Party of the U.S., the progressive wing of Labour has been largely destroyed. And if the hapless Gordon Brown should be defeated in the next election, or ousted in advance of it, any of several possible successors will be even more centrist than he.

New Labour has conflated British ambivalence about joining Europe with resistance to EU social policies that should come naturally to a labor party. For seven years, the Brits blocked a modest EU directive on protection of part-time workers, mainly to please their allies in British financial markets. Only when Brown found himself politically on the ropes at home this spring did he partly relent. The British Labour government even intervened before the European high court on behalf of the Baltic nations that wanted to flout Scandinavia's labor standards.

So if the practical failure of the market-fundamentalist formula has not yet produced a political counterrevolution, it is partly because nominal leaders of the center-left like Blair and Schröder and Bos (and Clinton) so thoroughly bought the neo-liberal recipe, leaving an institutional legacy that is difficult to reverse. Blair and Schröder not only neutered their own parties as counterweights to global finance but contributed to the ideological reversal of the EU. Even today, much of the nominal European center-left talks and acts like the right.


And now for the good news. Lest this chronicle seem unduly pessimistic, it should be said that Europe remains far more of a mixed economy than the United States. Most Europeans enjoy universal health insurance, child-care and parental-leave benefits that Americans can only dream about, as well as stronger unions, better pensions, and higher minimum wages. Most of Europe's outsiders get better basic social protections than America's insiders. The ideal of social partnership remains strong, even if its substance is too weak. "Decent Work," promoted by the unions and the International Labor Organization, resonates as a slogan that business finds hard to oppose.

The effort to modernize rather than scrap Europe's social model depends heavily on Europe's trade unions. The most important social counterweight to capital, not surprisingly, is labor. One can also find stirrings of the Global Opposition Party in the Party of European Socialists, the second largest grouping in the European Parliament. The PES leader is the former Danish prime minister, Poul Nyrup Rasmussen, the man most responsible for the Danish national policy of flexicurity. He and his colleagues have emerged as the European center of the opposition to financial domination of the real economy.

Meanwhile, global union federations, once moribund, have launched a new wave of coordinated international organizing. "The very size of global corporations is a kind of vulnerability," said Neal Kearney, head of the international textile workers federation, "because their brands rely on public goodwill." European trade unions, which used to spend little political capital on their brothers and sisters in benighted, union-busting regions like East Asia and the United States, are now vigorously using their power at home with global corporations to change company behavior worldwide. European unions have helped American unions oust union-busting managers in the U.S. subsidiaries of European hotel chains, cleaning and security-guard companies, and have put effective pressure on global giants with brand sensitivity such as Coca-Cola.

American unions have returned the favor in a surprising and hopeful way. In Europe, partly because most countries allow unions to represent workers who are not formally union members—this is the dried fruit of earlier live struggles—many unions have all but forgotten how to organize. And so the European labor movement is importing organizers from America, to learn the art of organizing all over again—the way France had to import California vines after the 19th-century phylloxera infestation killed French vineyards. Global labor organizing has resulted in dozens of "framework agreements" between global union federations and big multilaterals, committing the corporations to minimal standards of decency and to tolerance of union organizing. The challenge, of course, is to make these commitments meaningful on the ground, something I'll report on in a future piece.

While this article is mainly about political trends in Europe, there is a world beyond the Atlantic. Among the other trends that herald an ideological reversal are the worldwide challenge of global climate change; the rise of left parties and governments in South America; the demands by African nations to treat life-saving drugs as social goods rather than market commodities; the successful pushback against the one-size-fits-all prescriptions for privatization, financial speculation, and fiscal austerity of the International Monetary Fund and World Bank; and the fact that the most successful nations in East Asia never accepted the recipe of the IMF.

China, the world's largest creditor nation, has no truck with exotic derivates and uses its banks straightforwardly to finance enterprises. With 10 percent annual growth, it must be doing something right. In a charming irony, the Chinese chief financial regulator, Liao Min, recently admonished his Western counterparts: "They tend to overstate the power of the market and overlook the regulatory role of the government," he told the Financial Times. For now, China, with its lack of basic democratic rights and its alliance with global corporations, looks rather more fascist than social democrat. But one thing that it does not buy is financial neo-liberalism.

The fine details of an alternative global economic strategy are beyond the scope of this article. However, it would include a very substantial re-regulation of speculative capital, as well as the extension of labor and environmental standards to global commerce. Former Chancellor Helmut Schmidt of Germany has proposed a crackdown on regulatory and tax havens. For example, all banks that have accounts with the European Central Bank (all banks in Europe) could be prohibited from doing business with hedge funds and private-equity firms that operate from offshore havens with no regulation. And as the flexicurity policies of small trading nations such as Denmark and Sweden suggest, the death of the nation-state at the hands of the global market is much exaggerated. Good ideas to restore a more balanced economic system are plentiful. The problem is not that the state is incapable of acting to temper capitalism. The problem is that in most nations, the state is in the wrong hands. As a consequence, the European model of managed capitalism remains politically unstable and institutionally vulnerable. Unless a counteroffensive gains political momentum, the model will only erode over time. And the Global Opposition Party -- the international labor movement, the movement to save the planet, the socialists in the European Parliament, as well as the few genuinely left-of-center governments -- is still no match for the power and momentum of global finance. But if one dares to indulge some audacity, there is hope from a surprising quarter.


If you think American liberals are obsessed with the promise of Barack Obama, you should listen to European social democrats. Despite its weakened condition, the U.S. is still the world's most influential economy. Our friends in Europe are well aware that market fundamentalism originated in America -- and will best be extinguished in America. For now, Obama is reaching out to a broad range of economic advisers. But judging by his one major speech on financial regulation, delivered at Cooper Union in March, his own views are startlingly constructive.

Because of Europe's institutional fragmentation, the power of global finance, the domination of center-right governments in major European capitals, and the often surprisingly perverse role of the EU, the best hope for a different path is for the U.S. to reverse roles and become once again the engine of a balanced form of capitalism, updated for the 21st century. So I conclude my tour with one more paradox. America, whose biggest export these days is toxic financial products and market-fundamentalist ideology, has brought the world's economy to this precarious pass. But if the pendulum swings back, that momentum will most likely begin in the United States.

You may also like