(Bloomberg View) -- In the years since the 2008-09 financial crisis, cracks have appeared in the global hegemony of neoliberalism. The pressure to favor free markets and reject the social-welfare model (whose history I described in Part 1 of this article) has moderated somewhat.
In the U.S., President Barack Obama succeeded in installing the first general health-insurance system in the country's 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-care system was far too costly, precisely because of its social selectivity.
One can also observe a corrective tendency in China's own brand of capitalism. 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 in the U.S. or even Russia -- generate social tensions, protests and violence. In 2012, the authorities reported some 180,000 strikes and unofficial protest actions.
The Chinese people resort to these tactics because they do not have recourse to the kind of democratic institutions where compromises and solutions could be negotiated. Without renouncing its power monopoly, the Communist Party paradoxically tries to ease tensions by encouraging consumerism and pursuing a more active social policy. For some years, it has created the scope for wage increases 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 a 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 then oil prices have plummeted, and the sanctions after the invasion of Ukraine have hurt as well.
The Eurasian Economic Union might seem like a poor copy of the Soviet-era Council for Mutual Economic Assistance, but for Eastern Europe countries seeking integration it is nevertheless an alternative to the European Union. 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. Prime Minister Viktor Orbán, an obvious admirer of such an approach, has steered Hungary in this direction since the financial crisis.
In a sense, then, system rivalry is an issue within the European Union; state capitalism, like neoliberalism some 25 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 post-communist 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, labor migration from these countries has eased the pressure on them. But the waves of emigration to Western countries have come at a high political cost. The Brexit was primarily a populist vote against immigration from Eastern Europe.
Meanwhile, the Southern European states are more hesitant to initiate reforms. Yet they do not have the means to counter the crisis with spending 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 these market-driven approaches consistently. In general, neoliberalism is not to be equated with uninspired austerity policies. “Austerity” was only one of 10 points in the Washington Consensus in 1989. 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 center-left prime minister, Matteo Renzi, has tried to do this. His plans to deregulate certain sectors and relax employee protections, and the move by the Italian Democratic Party (Partito Democratico) 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 U.K.
Like Gerhard Schroeder, Germany's chancellor from 1998 to 2005, 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 Treaty's deficit limit of 3 percent of GDP for new debts.
But Renzi is facing problems that Schroeder did not have. The global economic context is considerably less favorable, and domestically, Italians' confidence in the ability of reforms to generate prosperity has faded. Growth rates have been disappointing, and the economy has stalled. If the reforms fail, however, the consequences could be fatal.
Italy could become ungovernable, and the euro zone could collapse. Therefore the current Italian government deserves as much attention and support as the countries of Eastern Europe previously received. If the balanced reforms take effect, which focus as much on governance as on the economy, 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 Chancellor 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 spending.
Poland, Slovakia and, after some hesitation, the Czech Republic 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-1990s, 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 financial crisis, this trend was stopped and in some cases even reversed. Private old-age plans were either assumed completely by the state (as in Hungary, for the aforementioned dubious reasons, Orban just wanted to fill holes in the budget) 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) that shaped the neoliberal epoch. The European model of the welfare state is no longer considered obsolete. It has a future again.
Yet this orientation toward a social market economy is not a universal phenomenon. While the German government is consolidating the welfare state domestically, 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 an asocial rather than a social market economy.
This inevitably causes tensions in the European Union and increases 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 began 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, and most recently the Brexit, has furnished ample evidence of the vulnerability and volatility of the order created in 1989.
This is the second of two excerpts from "Europe Since 1989," to be published in English on Oct. 5 by Princeton University Press. The book, by Philipp Ther, won the Leipzig Book Fair Prize for nonfiction. It was translated from the German by Charlotte Hughes-Kreutzmüller. (Read the first part here.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story: Philipp Ther at philipp.ther@univie.ac.at.
To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net.
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