The social politics of the economic crisis

High unemployment, strained pensions, social benefits, and public finances put enormous pressure on elected politicians. European citizens continue to hold high expectations of social protection from economic uncertainty. Fiscal consolidation, social retrenchment, and labour market reform packages have already been met with a wave of strikes, walkouts, and demonstrations in Greece, France, Italy, Latvia, Germany, Portugal, Spain, Ireland, and Belgium. In view of the likelihood of relatively low growth, a critical challenge that political leaders face is one of managing social expectations.

To the extent that effective crisis management implicates specific domestic policy measures of supranational coordination, whether such interventions are in fact enacted depends to large a degree on the political context of the day. Under conditions of great uncertainty, economic turmoil easily polarizes policy analysis and strategy. The eurozone sovereign debt crisis is a case in point. Since 2010, the economic policy debate is taking place both within and between the member states of the eurozone European Union, and between EU institutions and national governments. The failure to articulate and enact a unified eurozone crisis resolution mechanism is evidence of a deepening divide in policy analysis and strategy between the prosperous north of the eurozone, led by Germany, clamouring for fiscal prudence, and the besieged southern periphery, exemplified by Greece, which fears radical austerity will depress growth and thus make fiscal probity self-defeating. Across the Atlantic, the bitter debates over healthcare reform and the public debt ceiling in the US also testify to the significant political hurdles for reforming Anglo-American welfare capitalism.

In hard economic times politics and economics become inseparably linked. Large-scale social hardship motivates political mobilization to mitigate joblessness and rising poverty. By the same token, the economic imperatives of recovering growth, job creation, and fiscal balance can be presented as political imperatives for welfare retrenchment and the restoration of open and free markets. We know from the recessions of the late 1970s and early 1980s how hard times can exacerbate existing tensions, invariably decreasing satisfaction with existing governments. In 2008, government turnovers in Iceland, Latvia, Hungary, Greece, and the Czech Republic can be viewed as the first political repercussions of the crisis. The election of Barack Obama as President of the United States of America can also partly be attributed to the Wall Street crash. Significant gains of the far right, populist, anti-EU, nationalist parties in Denmark, Austria, Hungary, the Netherlands, and the UK in the 2009 and 2010 national elections, moreover, suggests that the crisis had fuelled xenophobia and protectionist sentiments. Victories of conservative parties in Ireland, Sweden, Portugal, and Finland are more recent examples of financial crisis punctuated political change. By the summer of 2011, as Spain moved into the frontline of the eurozone's sovereign debt and banking crisis, the Socialist prime minister, Jose Luis Zapatero dissolved parliament and announced early elections, which were ultimately won by the conservative Partido Popular led by Mariano Rajoy won in November 2011. Italy and Greece, meanwhile, resorted to installing technocratic caretaker governments, under the helm of, respectively, Lucas Papademos, a former member of the Executive Board of the ECB, and Mario Monti, a former European Union commissioner, both committed to painful austerity reforms to keep their debt-ridden countries within the eurozone, before new general elections.

What is perhaps most perplexing about European politics in the immediate aftermath of the 2008 credit crunch is that while opinion surveys continue to display tremendous support for the welfare state, its most ardent political advocate—social democracy—has politically suffered the most. On the other hand, as the crisis is more likely than not to result in an extended period of low growth and high unemployment, the voting public may grow disenchanted with prevailing recipe of fiscal austerity, as the re-election into government of the centre-left in September 2011 in Denmark seems to suggest. Dire economic conditions are making it increasingly difficult, even for ruling governments in most European polities, to abandon standing welfare commitments. French presidential elections in the spring of 2012 will be an important testing-ground for EU economic governance, welfare, and labour market reform, with large numbers of voters experiencing the real pain of austerity.

Long before the near economic meltdown of 2008, middle-class fears, especially for their offspring, of falling behind have invoked a narrative of a lost 'golden age' of welfare capitalism. This narrative of welfare paradise lost is being used to challenge globalization, large-scale immigration, and most precipitously the European Union. Rising fears of falling behind have gone hand in hand with stronger electoral abstention and growing support for right-wing populist and anti-EU parties. In the 2005 French referendum over the proposed Constitutional Treaty of the European Union culminated in a heated ideological battle between different socio-economic models, revolving around two polarized options: the 'French' social model, which purported to offer a high degree of social protection, versus the (false) stereotype of the 'Anglo-Saxon' model of capitalism, described as a 'free market without a safety net' (see Swenson, 2002; Pontusson, 2005; Alesina and Giavazzi, 2008; Baldwin, 2009). Various public opinion polls overwhelmingly reaffirmed that citizens held their national governments accountable for their security and wellbeing, and felt betrayed by the globalizing ambitions of the EU (Boeri, Borsch-Supan, and Tabellini, 2001; Harrison etal., 2011).

The aftermath of the financial crisis has brought many European welfare states to a new political crossroads. Growing support of anti-EU, anti-immigrant, radical right-wing populism puts pressure on existing governments and centrist social democratic and Christian democratic parties to water down their commitments to European integration. As a result, the political legitimacy of the EU suffered tremendously in the wake of the crisis. However, and in spite of all-time low domestic political support for the EU, eurozone political leadership and the ECB, policymakers have stepped in with important supranational initiatives, including enlarged rescue packages, lower interest rates for Greece, Ireland, and Portugal, and more fiscal coordination over the past years. But while these crisis-induced interventions towards enhanced EU economic governance have been necessary to stabilize the eurozone, they are politically at odds with the overall popular sentiment of Euroscepticism (Fligstein, 2008).

Can the European Union stay unified in the new stage of the financial and economic crisis? Will the enthusiasm for austerity backfire into years of stagnation, more intergovernmental bickering among the leaders of the EU, alongside intense domestic social conflict? It is difficult to say. There appears to something of an 'political vacuum', between EU market and currency integration and domestic social and economic policy autonomy. The prevailing sentiment of self-contained national welfare states today belies the extent to which Europe's social market economies have, over the past decades, become part and parcel of an overwhelmingly Europeanized interdependent political economy. Mario Monti, in his important 2010 report on the future of the Single Market, wrote about the urgent need for 'appropriate reconciliation' between the single market and national social and economic policy priorities (Monti, 2010). But with the deepening of the eurozone sovereign debt and currency crisis in 2011, it has become increasingly difficult for pro-European mainstream parties to advance, support, and claim credit for much needed domestic welfare state modernization, on the one hand, while at the same time establishing much-needed pan-European macroeconomic governance structures. More than ever, the biggest barrier to an effective European response to the crisis, to save the euro and maintain the welfare state, is political indeed.

 
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