Europe after Neoliberalism

In recent years, the authoritarian turn in Eastern Europe and the plight of the southern EU countries has prompted growing demands for new, post-neoliberal concepts.50 The horrendously high rate of youth unemployment is only one factor in a fundamental social imbalance that affects even those who have been lucky enough to find a job. Most young people have short-term contracts, and their terms and conditions are as bad as their wages. With an average taxable income of 540 euros, very few Italians under age thirty-five today are paying substantial social security contributions. Poverty will therefore be passed on from today’s youth to the middle-aged generation and the pensioners of the future. The Germans living off Hartz IV benefits face a similar problem. If the Italian economy continues its current downward trend, the welfare state as it now exists, with a pension and health insurance system, will not be sustainable.

As Western Europe’s cotransformation since the nineties has shown, the states and societies of Europe operate as communicating channels. Changes on one part of the continent cannot take place without affecting the rest. Sooner or later the social hardship in southern Europe will have an impact on the wealthier EU countries, whether in the form of increasing wage pressure or labor migration. This admittedly pessimistic scenario is based on the premise that falling wages and reductions in welfare benefits will hit one country after the next.

Germany is a case in recent European history of this scenario’s becoming reality, at least in part. The failure of a quick westernization of the former GDR and economic competition from Eastern Europe plunged the German economy and welfare state into deep crisis in the nineties. Eventually, the decline was halted by a downward adjustment of social standards. The welfare state reforms of 2001–5, initiated by the Social Democrats and the Greens, brought dramatic, controversial changes. Nevertheless, this path of development was evidently more successful than the ones taken by Italy or France—two countries with conservatively structured societies, which have compounded their seemingly endless crises by allowing their national debts to rise and losing economic competetiveness. Yet southern Europe’s plight since 2009 was also caused by a downward adjustment. Wages in Italy, Spain, and Portugal have come under pressure because the goods traditionally produced in these countries can be more cheaply manufactured in the new EU countries or outside Europe.

Lastly, countries have faced strong pressure to conform in the sphere of economic policy. It is virtually impossible for any individual nation to resist the combined demands of all the major international financial organizations to initiate neoliberal-style reforms. The transnational character and discursive hegemony of neoliberalism ensured the resounding impact of the Chicago School doctrines. How they were adapted locally depended upon the individual countries’ perceived need for reforms, and the extent to which they relied on international loans or aid. A third contingent factor was acute economic crisis. But rather than being externally driven, this is on the whole a systemic problem.

Neoliberal mechanisms and European history since the 1980s can be summarized best in metaphorical terms. This movement was like a shiny express train that promised to take passengers to an enticing destination—of growth and prosperity. At one point, all the countries of Europe wanted to get on board; none could resist its allure. Moreover, it seemed to be the only train to the future after the end of system rivalry between East and West. The first passengers to board were Poland, Czechoslovakia, Hungary, and one formerly known as the GDR. Sometimes the passengers felt nauseated because of the high speeds at which they were travelling and the reform-remedies they were forced to take, but by the mid-nineties they were starting to feel a little better. The conductor and the waiters in the dining car (the international financial organizations) proudly announced that the shock therapy was working. Whether this was actually true is disputable, but the signs were right: growth curves, foreign direct investments, and other coefficients—the neoliberal order was distinctly statistic-fixated—pointed upward.

For this reason, other countries that had previously missed the train due to revolution, independence occurring later, postcommunists remaining in power, or other factors now wanted to get on board, too. Some of these passengers—namely the Baltic states, Slovakia, and, a little later, Romania and Bulgaria—tried to catch up with the frontrunners by implementing even more radical reforms (see chapter 5 on the second wave of neoliberalism). This, too, caused pain and sickness, but turned the postcommunist countries into “emerging markets” and some of them even into “tiger economies.” Germany, which was still clinging to the running board, did not want to remain the sick man of Europe, so it entered the neoliberal train as well.

The passengers met several times a day in the dining car. There was no choice on the menu; the one, standard meal was served by Western waiters (the IMF, the World Bank, the OECD, and a number of private think tanks). The appetizer was a dish called “austerity.” The travelers did not always want to eat the meal and certainly not to swallow all of it, but they sensed the power of the waiters, who could collect old debts at any time and who seemed to have a monopoly on economic wisdom. The waiter from Brussels was rather popular, as he served hors d’oeuvres (such as the aid program PHARE, see chapter 5) and promised many passengers that he would always serve them if they fulfilled the right requirements. The dining car was a great place to give speeches about reforms. The representatives of the “small nations” liked to be seen as model passengers, and spoke of a market economy “without attributes.” Meanwhile, the waiters repeated their mantra of “privatization, liberalization, deregulation” like a mealtime prayer.

Other guests in the dining car were gentlemen in business suits (fund managers, bankers, and CEOs of various companies). They were looking for opportunities to lighten their heavy wallets, but not by making gifts—they tended to hide the fact that they sought high returns and profits. The men in suits were especially inclined toward passengers who demanded freedom for the economy, and rewarded them for their boldness. Even the poorest fellow travelers benefited from their generosity. They were given FDI, a kind of magic potion that, unfortunately, can be addictive. The businessmen said the train had to go faster. At their behest it accelerated so much that the railway switches and alternative tracks became a blur. Due to the extreme speed, the train overheated. Passengers started removing their outer clothing (the rather flimsy welfare state), encouraged by the waiters, who said they would travel even faster if lightly dressed. This prompted the passengers to remove ever more clothes. One of them, a former KGB spy named Vladimir Vladimirovych, protested against the waiters’ opinions and left the train. Since then he has tried to get another train, named state capitalism, on track. At first, the others did not take him very seriously. But that changed when he started trying to drag his neighbors by force onto his train, which now bears the insignia “Eurasian Economic Union.”

Despite these disruptions and intermittent crises, the neoliberal train sped so fast that one could no longer see the people driving it. Looking very closely, it was just possible to discern that they were also wearing business suits. They thought they were acting very rationally, but suddenly, in 2008, panic broke out, first in the locomotive and then in the passenger cars. The train almost came off the rails but, screeching loudly, came to a standstill just in time. Yet despite having narrowly avoided a disaster, it did not change tracks.

On the contrary, new passengers now boarded (the Southern European EU states) because nobody would lend them any more money for the station restaurant where they liked to dine, unfortunately on credit. The men in business suits started to act quite differently. For a while, they refused to hand out FDI, but persistently inquired about ratings and told the Southern European passengers that they should tighten their belts.

The constant diet of lean meals and bitter pills soured the mood in the train. Prior to 2008, all the passengers had believed they were heading for a rosy future. But now most of the travelers were becoming anxious or even furious. Some suddenly felt very cold, especially those who had ostentatiously stripped down to almost nothing. The German and Polish passengers and a few others noticed this and decided to take the Keynesian menu, which they found warming and wholesome.

But the German passenger, a very powerful woman who some thought was the new engine driver, refused to pay or even jointly manage the debts of other passengers (for instance, with the help of euro-bonds). On the contrary, she told the Southern European passengers to follow the example of the Eastern Europeans on board, who had swallowed the most pills and become quite thin. For the time being, all the passengers of Europe are still on board the same train. But whether this remains so is anybody’s guess. Perhaps they are only sticking together because they know that similar trains in other parts of the world, like China, are traveling even faster, paradoxically driven by men who still call themselves communists.

Before setting aside the train metaphor, one question must be asked: Are there any signs that it might change track in the future? To assess the situation, the global context must be taken into account. This has changed considerably since 2008–9. The incumbent US president has given the country its first general health insurance system in history. Thus Washington has moved closer toward the European welfare state model. It did so not for purely altruistic reasons but partly on economic grounds. The predominantly privately financed American health system was far too costly, precisely because of its social selectivity. One can also observe a corrective tendency in the Chinese communists’ policies. The upswing of the last three decades has split Chinese society into a small upper class, an urban middle class, disenfranchised migrant workers, and the undeveloped rural population. These divides—Chinese society is far more unequal than that in the United States or even Russia—generate social tensions, protest, and violence. In 2012 the authorities registered some 180,000 strikes and unofficial protest actions.51 The population resorts to these methods because it does not have recourse to the kind of democratic institutions where compromises and solutions could be negotiated. Without renouncing its power monopoly, the communist party tries to ease tensions by encouraging consumerism and pursuing a more active social policy. For some years, it has created the scope for wage raises and mass consumption, and attempted to build a welfare state with a pension and health insurance system. But this more socially equitable version of state capitalism can work only if the economy generates enough growth. In recent years, Chinese growth has considerably slowed, while private, commercial, and public debt has sharply risen. The future of this model is therefore open.

In the Russian variant of state capitalism, economic growth is impeded by a lack of social underpinning. Private enterprise is poorly developed; Russia lives primarily off the revenue from its oil and gas exports. Up to 2014, these were sufficient to place Russia on an equal footing with the economically ailing West, but since 2015 oil prices have plummeted. The Eurasian economic union might seem like a poor copy of the Council for Mutual Economic Assistance, but it is nevertheless an alternative to the European Union for Eastern European countries seeking integration. The Eurasian union appeals more to autocrats, not least because of its looser approach to human rights, democratic participation, and supranational governance.

Both the Chinese and Russian variants of state capitalism are full of contradictions. But their blend of authoritarian regimes with partially free market economies (less so in Russia than in China) has nevertheless come to pose a serious economic and political challenge to the West. Viktor Orbán, an obvious admirer, has steered Hungary in this direction since the crisis. In a sense, then, system rivalry is an issue within the European Union; state capitalism, like neoliberalism some fifteen years ago, is not only looming on the horizon but has already arrived in the EU.

To deal with these external and, to some degree, internal challenges, the European Union needs to be as united as possible. But in fact the economic policies of the old and new EU member states are disuniting. Some postcommunist countries have further slashed their social benefits in response to the great recession of 2008–9, thus continuing along a neoliberal path of development. To some extent, this has been facilitated by labor migration, which has eased the pressure on these countries. Meanwhile, the southern European states are more hesitant to initiate reforms. Yet they do not have the means to counter the crisis with expenditure programs. Austerity policies may have helped lower the deficits in these countries’ national budgets—Greece and Italy achieved a so-called primary surplus before paying interest on their old national debts for certain budgetary years—but they have paid a high social and economic price. Politically, the European Union carries the cost of being held responsible for neoliberal policies, even though it does not pursue them consistently.

In general, neoliberalism is not to be equated with uninspired austerity policies. “Austerity” was only one of ten points in the Washington Consensus. If a government is serious about obeying neoliberal doctrine, it should follow up austerity with further reforms, such as privatizing state enterprises and liberalizing the labor market. Since the failure of Italy’s technocratic government under Mario Monti, the current premier, Matteo Renzi, has attempted to do this. His plans to deregulate certain sectors and relax employee protection, and the Italian Social Democrats’ (Partito Democratico) move toward the political center, are reminiscent of the German reforms instituted by the Social Democrat–Green government in 2001–5, and of New Labour in the United Kingdom. Like then–German chancellor Gerhard Schröder, Renzi does not want to jeopardize his reform policies by adhering to a rigid austerity policy. He has therefore taken a loose approach to the Maastricht deficit limit of 3 percent of GDP for new debts. However, Renzi is facing problems that Schröder did not have: the global economic context is considerably less favorable, and internally, confidence in the ability of reforms to generate prosperity has faded. But the consequences could be fatal if the reforms fail, ranging from Italy becoming ungovernable to the collapse of the eurozone. Therefore the current Italian government deserves as much attention and support as the countries of Eastern Europe previously received, maybe even including experts from these countries. If the reforms take effect, the result would be a revitalized Italian state, sharing in the relative vigor of regions such as Renzi’s home, Tuscany.

Germany has been working toward a consolidated welfare state for some years. The growing tax revenues achieved by the various government coalitions under Angela Merkel have been used not to relieve taxpayers, as they were under the Social Democrat–Green government, but to achieve a balanced budget and finance social expenditure. Germany’s eastern neighbor states are basically pursuing a similar budget policy. Economizing is no longer their top priority; they are building up their welfare states rather than stripping them down.

The about-face over welfare state reforms illustrates this particularly clearly. Beginning in the mid-nineties, European governments, first in the east, then in the west, tended increasingly to hand pension and health insurance systems to the private sector. This marked a new dimension of privatization, as it no longer affected only the economy or previously state-run enterprises such as postal services or railways, but also core areas of the welfare state. After the crisis, this trend was finally stopped and in some cases even reversed. Private old-age provision was either assumed completely by the state (as in Hungary, for the aforementioned dubious reasons) or greatly restricted (as in Poland and Slovakia, partly because of the high administrative costs incurred by the insurance companies). The pay-as-you-go system, based on social and generational solidarity, was thus revived. This had an impact on societies’ values as well as their politics. It challenged the simple dichotomy between state-run (bad) and private, or privatized (good), which shaped the neoliberal epoch. The European model of the welfare state is no longer considered obsolete. It has a future again.

However, this orientation toward social market economy (or, alternatively, ordoliberalism) is not a universal phenomenon. While the German government is consolidating the welfare state internally, it is prescribing a debilitating austerity policy to southern Europe. Cost-cutting programs may be unavoidable once a certain level of debt has been reached, but these are rarely attended by the necessary measures to improve prospects for the underprivileged classes, especially the younger generation. As long as the focus remains fixed on fiscal policy and austerity, Angela Merkel will be perceived as an advocate of asocial rather than a social market economy. This inevitably causes tensions in the European Union and rising support for populist parties, a development that was evident at the European elections of 2014. One can resign oneself to the fact that the societies of the European Union are growing further apart (also as a result of the refugee crisis that broke out in 2015) or one can hope for better times ahead. But before the continent’s future is left to “the markets,” the wealthier countries of Europe should conduct an open political debate about the potential consequences, such as mass labor migration or the further weakening of the European Union. The history of Europe in the past three decades has furnished ample evidence of the vulnerability and volatility of the order created in 1989.

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