Monday, 7 May 2012

After the Third Way

This article was  published on 06 May 2012 in The Malta Independent on Sunday
Françoise Hollande will probably be elected President of the French Republic for the next five years.

There are two ways in which such a result can be interpreted. The most obvious one is that this is a continuation of the trend where the electorate takes it out on whoever happens to be in government during the economic crisis that has been ongoing since 2008. This would mean that a Hollande victory is mainly by default, with Sarkozy suffering the same fate as Gordon Brown in the UK, Brian Cowen in Ireland, Silvio Berlusconi in Italy, Jose Socrates in Portugal, Jose Zapatero in Spain and George Papandreou in Greece, among others.
According to this theory, the electorate takes it out on whoever happens to be in government no matter their colour or political creed. In the case of Greece and Italy, it was not even the electorate through formal elections that bought down governments. It was more pressure from the international community and support of public opinion to install temporary technical governments to clean up the problems that the politicians left behind or could not address.

The other interpretation is more profound. It is that after toppling socialist governments in UK, Spain, Portugal and Greece, Hollande’s victory represents a new dawn for the political left as electorates abandon the indiscriminate austerity programmes advocated by Chancellor Merkel and her submissive colleagues on the right of the European political spectrum, and are prepared to trust the left wing to recreate a post Third Way political strategy based on restructuring with growth.

More out of wishful thinking rather than conviction, I am prepared to subscribe to the latter interpretation for Hollande’s election. At present, centre-right parties or coalitions govern all the large and many of the small EU countries. Angela Merkel is their undisputed queen. They have badly misdiagnosed the problems that caused the financial crisis by thinking that every country is like Greece and that the solution is austerity and cold-blooded restructuring. If the medicine does not work, they increase the dose even though the patient became feebler as a result of the first austerity dose. If the second dose does not work, increase it further without giving much thought to whether the medicine could kill rather than cure the patient.

The result is a Europe out of work. The work situation is so bad that in Germany, by far the best of the lot, there is ‘only’ an unemployment rate of 5.6 per cent overall and 7.9 per cent among young people. Obviously, this looks good compared to Spain’s 24 per cent overall and nearly 50 per cent among youth. For how long will 25-year-olds stay at home watching TV, seeing life passing them by as their dreams get shattered? Unless we do something bold and soon, we are about to lose a whole generation who will then seek justice through anarchy or other violent demonstrations against the rule of law, democratic institutions and social injustice.

Merkel and Co misdiagnosed the problem and consequently came up with irrelevant solutions that could kill the patient. Outside Greece, which represents only two per cent of the eurozone, fiscal profligacy is not the root cause of the problem that led to the crisis. Spain and Ireland had stood out for their low ratios of debt to GDP five years ago, with levels well below Germany’s. Italy had a high debt ratio but a favourable deficit position.

Many of these countries are now in trouble because the financial crisis underway since 2008 has damaged their private sector owned financial systems and led to collapse in growth. High deficits are more a symptom rather than a cause of their problems. Treating symptoms rather than causes often makes the patient worse. The results are there to see.

Hollande’s election today is hopefully a breath of fresh air, forcing the European conservatives to realise that their austerity-focused cure is not working. Hollande could be a catalyst for consensus building to adopt a more balanced solution where growth rather than austerity becomes the inspiration for restructuring.

Obviously, Hollande should not start his presidency with an existential fight with Merkel. But even before he is elected, Hollande has already forced a re-appreciation on the futility of the current ‘austerity and more’ policies. The Netherlands, traditionally a fiscally conservative country, is already showing signs in its political structures that austerity alone is not working. Mario Monti, well respected beyond the shores of Italy, has been emphatically repeating that more austerity will be simply counter-productive. Spain’s Prime Minster Rajoy signed the fiscal compact at gunpoint and before the ink was dry went on record stating that Spain cannot really meet its austerity-induced fiscal targets.

Even Mario Draghi, President of the ECB, has been clear that their policy of flooding the banking system with liquidity can only be expected to buy time for politicians to do what needs to be done to devise a permanent solution to the problem. He has actively proposed a ‘growth pact’ to run in parallel with the now derided ‘fiscal pact’.

So where would the centre left of the European politics be going, following the expected re-conquest of the Elsyée this evening? They cannot go back to their traditional far left policies which simply cannot work in the context of a globalised economy. Much less can they go back to the Third Way of Mitterand, Tony Blair/Gordon Brown, Felipe Gonzales/Jose Zapatero. The Third Way was a political philosophy based on the marriage of economic efficiency with social justice, presided over by a benign self-limiting State.
However well-intentioned, its simultaneous embrace of freewheeling financial markets and extensive social provision did not, when the real crisis came, amount to an economic policy. As John Kay, of the London School of Economics recently said: “The centre-left offered no diagnosis, no new ideas and gained no political advantage. The political parties that had waited a century for capitalism to collapse under its own weight, congratulated themselves that the collapse had been staved off by the injection of simply incredible amounts of taxpayers’ funds into the banking system.”

To which I would add that the centre left’s Third Way embraced the doctrine of the market knows best for economic efficiency too liberally. Gordon Brown’s light touch financial regulation generated substantial tax revenues from the City until the financial crisis forced taxpayers to put back the money they had already consumed to save the banks from collapse. Spain and Ireland’s free-wheeling in construction and over development generated substantial fiscal revenues from property sales until the property bubble burst and the taxpayer is now saddled with substantial burden for saving their banking system from total collapse under the weight of their bad loans to real estate developers.

Hollande’s occupying a seat at the duo driving the EU alongside Merkel should be a new dawn for a post-Third Way era for socialist parties in Europe, including our own Labour Party.

The blind belief that less government is good for the economy and that more government is a sure way to economic stagnation has been totally disproved by the financial crisis, which is still dragging on since it erupted four years in 2008.

In the post-Third Way era, left of centre parties have to embrace market mechanism for operational economic matters but must not abdicate the government’s responsibility for better and stricter regulation, for better and fairer competition and for maximum value for taxpayers’ funds. More government does not have to mean more government spending. It should mean better government policies that protect the taxpayers from too-big-to-fail policies and from unbalanced economic development, which is unsustainable notwithstanding its short-term benefits.

Welcome on board the post Third Way era, Monsieur Hollande!

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