Europe's "New" Third Way

Report Europe

Europe's "New" Third Way

May 11, 1999 16 min read
Christian Watrin
Policy Analyst in Empirical Studies

Are the "new" social democratic parties in Europe simply disguised libertarians, still calling themselves "socialist" but basically supporting neoliberal ideas? This has often been claimed in recent public policy debates. For example, in Great Britain it has been claimed that Tony Blair and his "new" Labour Party have continued the economic policies of Margaret Thatcher and her Conservative Party. Equally, the economic reforms in New Zealand, which turned the economy from a sclerotic, collectivist welfare state into a modern, flourishing market economy, were partly initiated by a party from the left. And didn't President Bill Clinton promise to "end welfare as we know it?" And isn't Germany's Social Democratic Party (SPD), together with its left-wing Green coalition partner, in the process of abandoning its deep-rooted pacifism of the left by entering the Kosovo war?

Despite the fact that these observations appear to be correct, I do not share the view that the social democratic parties in Europe are born-again liberals in the widest sense of that word, as used in recent debates. (In Europe "liberal" is very often a synonym for "modernity," or a description of the lifestyle and views held by enlightened man. And, contrary to the usage in English-speaking countries, "liberal" is not a term used to describe social democratic values.)

In my opinion, not much has changed during the decade since socialism collapsed in the former Soviet Union and its satellite countries. One cannot deny that reformers and/or modernizers are at work in left-wing parties. But this is neither astonishing nor new. Viewing the history of Germany's SPD after World War II, the Bad Godesberg program--which was accepted by the party delegates in 1958 and which distanced the party from the old Marxist ideas--did not prevent the revival of neo-Marxism among their ranks only a decade later.

It is normal that bigger parties possess at least two wings battling for control of the party's political path when they assume power. In Germany, if Oskar Lafontaine, chairman of the SPD and then Minister of Finance, had won his battle with Chancellor Gerhard Schroeder, the SPD would now be leaning further to the left, and it is doubtful that German military aircraft would be with the North Atlantic Treaty Organization fighting against
President Slobodan Milosevic and his militia over Yugoslavia. Schroeder, former chairman of the radical Social Democratic Student Association, defeated Helmut Kohl and his Christian Democratic Union (CDU) in the September 1998 elections while claiming to be a modernizer not only of his party but also of his country. His position in his party, however, is endangered. He might soon suffer the same unkind fate of his predecessor, Helmut Schmidt, when he lost the backing of the SPD in the early 1980s over the battle to install Pershing missiles on West German territory.

In the following remarks, I will attempt first to describe what traditional socialism strives for and then proceed to what is called the "new" social democratic point of view.


It is said that socialism grew out of the industrial revolution and the breakdown of the "old society"--to use Alexis de Tocqueville's terminology.

The introduction of liberal principles during the first phase of the French Revolution (1789-1793), the scrapping of the feudal and mercantilist economic order, and the emergence of dynamic markets and new production techniques completely changed the old static societies. Large numbers of small-scale businesses, organized in traditional craft guilds, disappeared, and industrial undertakings took their place. Similar to today's pressures of globalization, new explanations of the world came to the fore. Early socialists like Claude Henri de Rouvroy Saint-Simon and Charles Fourier developed utopian ideas for the betterment of the world and founded socialism as a philosophical and ethical system of thought.

But the most impressive thinker, at least in continental Europe during the 19th century, was Karl Marx, who in his theory of capitalism argued that he had discovered the iron laws of the development of human societies. In his theory on the eras of history, he claimed that capitalism inevitably would be replaced by socialism and, later, by full-fledged communism and the classless society. Socialism became "scientific"--a construct of ideas according to which the end is already known, and in which any endeavors to change the course of events would be frustrated.

All socialist European parties came under the influence of Marx's thinking. Even today, radical Marxism plays an important role for many in the left wing. In other words, Marx is not dead.

Marx and his followers were so preoccupied with their theory of human history that they did not realize the incompatibility of their position with the pretension of socialism to being an ethical system. If history inevitably moved along the road toward a classless society, then all efforts either to change or to accelerate the course of events would be senseless. In spite of some ambiguities in Marx's theory, the only matter of dispute among socialist thinkers was whether a revolution or a peaceful development sped up by the introduction of universal suffrage would be either necessary or sufficient to reach the end stage of history. The controversy surrounding this point was one of the reasons the leftist political movement in continental Europe split into a communist and pro-revolutionary wing on the one hand, and a social democratic grouping, favoring the democratic approach to the putative end-state of society, on the other.

Left-wing parties didn't come into power before the end of World War I (1914-1918). When this happened, they realized that the whole Marxian body of thought would not be very helpful in coping with the problems they were facing in the war-torn societies. Since then, two schools of thought can be distinguished: totalitarian socialism, on the one hand, and democratic socialism on the other. The totalitarian movement seized power in Russia (1917), and what was later called the Soviet model and democratic socialism was successful mainly in West European countries, among them Germany and Austria.

The totalitarian socialists or communists resorted to the meager 10-point program of the Communist Manifesto, written by Marx and Friedrich Engels in 1848. In this document, the two authors recommend:

  1. the abolition of private ownership of land and application of all rents toward public purposes;

  2. a progressive income tax;

  3. the abolition of the right of inheritance;

  4. the confiscation of all property belonging to emigrants and rebels;

  5. the centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly;

  6. the centralization of the means of communication and transportation in the hands of the state;

  7. an increase in the number and size of factories and instruments of production owned by the state;

  8. equal liability of all vis-à-vis labor;

  9. the combination of agriculture with industrial production; and, finally,

  10. free education for all children in public (i.e., state) schools, along with the abolition of
    children's factory labor in its present form and the practice of combining education with industrial production, and so forth.

(Incidentally, this short list contains some interesting criteria to find out whether a country should be considered socialist or capitalist.)

From the short list just mentioned, you can deduce easily that collective property, central planning, and the elimination of markets are compatible with the original ideas of Marx.

In Western Europe, the 1920s and 1930s were the decades in which totalitarian and authoritarian movements came to power, the most destructive of which was Adolf Hitler's National Socialism. After World War II and during the reconstruction period, democratic socialists in Europe had to write their political programs anew. In Sweden, where the Socialist Party has ruled, with minor exceptions, since the 1940s, a democratic version of socialism was developed that led to the well-known welfare state program that plays an important role in other Scandinavian countries, too. In Great Britain, the Labour Party came into power immediately after the war and introduced the equivalent of the Swedish model based on Fabian thinking--and not on Marxist views. In continental Europe, classical liberal ideas under the heading of social market economics experienced success in Belgium, Switzerland, Italy, West Germany, and Austria, whereas France was inclined to follow the ideas of the so-called economié concerteé--a somewhat shaky mixture of central planning without compulsory commands by state authorities--plus other all-encompassing interventions into the economy.

In light of the great success of market-oriented political and economic policies in the 1950s and 1960s and the depressing "Iron Curtain" that had descended from the Baltic Sea to the Black Sea, the social democratic political and economic programs that relied too heavily on Marxian thinking had to be revised. As I mentioned previously, the Bad Godesberg program of Germany's SPD dropped the Marxian elements of the party's platform, especially the central planning proposals, to which large parts of the party adhered after the war. The rules of the free market gained support and, instead of central planning, some sort of macroeconomic steering of the economy along Keynesian guidelines was proposed. But during the high tide of neo-Marxism in the late 1960s and early 1970s, a nostalgic return to the old ideas of the 19th century was en vogue. Even today, the SPD is not fully immune from the Marxian temptation: witness its inclination to establish coalition governments with the former communist Socialist Unity Party (SED), the party that ruled--and ruined--East Germany for 40 years. The SED changed in name only, from the SED to the PDS (i.e., the Party of Democratic Socialism), without really converting its political and programmatic position. And it is now the coalition partner with the SPD in an East German state; and, after elections to be held later this year, it might become the political partner of the SPD in other East German states as well.


The affinity with radical Marxism is only part of the picture. The social democratic modernizers are also an important group to consider. But what is the model they are striving for?

For several decades, Sweden, one of the few European states that stayed neutral during World War II, was a role model for social democratic modernizers. For a long time, Sweden was one of the wealthiest countries in the world. Its system of social services covered all sorts of risks. Its society was egalitarian, and the overwhelming majority of its citizens was in favor of the folkhemmet. (This term is literally a combination of folk--that is, people"--and hem, which means home.

If the all-embracing welfare state, which substituted the security of the government for the traditional ties of family, had not run into grave financial problems, Sweden would still be "Mecca" for social democrats. But Sweden's extremely high level of government expenditures on its social welfare programs could not be sustained. In fact, government spending rose from approximately half of gross domestic product (GDP) in 1975 to two-thirds in 1995. The record was set in 1993--ironically, under the non-socialist administration headed by Carl Bildt--when public spending equalled 74 percent of GDP.

In Economic Freedom of the World: 1997 Annual Report (Vancouver, B.C., Canada: The Fraser Institute, 1997), James Gwartney and Robert Lawson rank Sweden 42nd out of 115 in its measure of economic freedom. According to the 1999 edition of the Index of Economic Freedom, edited by Bryan T. Johnson, Kim R. Holmes, Ph.D., and Melanie R. Kirkpatrick (Washington, D.C.: The Heritage Foundation and the Wall Street Journal, 1998), Sweden comes in 33rd among 160 states. These findings indicate Sweden lags behind such countries of approximately the same size as, for example, Austria, Belgium, and many developing countries. This performance is not very impressive. Further, in recent years Sweden's social democratic government has pursued a policy of trimming down its welfare state; public spending is now down to approximately 50 percent of GDP, but this is still very high. At the same time, the government's highly interventionist economic policies were reduced, and more market-oriented policies were adopted.

This leaves the social democratic parties in Western Europe in an unpleasant situation: Which path should they follow? and what does social democracy stand for now? Prime Minister Blair created the concept of "New Labour" and Chancellor Schroeder won an electoral victory in September 1998 by coining the slogan of a "new middle." From the point of view of political economy, the latter sounds like a simple application of the median-voter theorem of public choice theory. Nevertheless, Schroeder's wording was successful, and the CDU--the party of Germany's seemingly life-long Chancellor, Kohl--was defeated, receiving only 35 percent of the total vote.

The Schroeder strategy led to an extensive public discussion of whether left-wing parties now follow the route known as the "third way" in public policy deliberations. The term "third way" has been used many times. Wilhelm Roepke, one of Germany's staunch neo-liberals who was expelled by the Hitler government in 1933 and, together with F. A. Hayek, founder of the classical liberal Mont Pelerin Society, described his concept of a free society as the third way between socialism, on the one hand, and "historical"--as he used to say--liberalism on the other. Ota Sic, Minister of Economic Affairs of Czechoslovakia who left his home country after the demise of the "Prague Spring" in 1968 at the hand of occupying Soviet troops, called his market socialist design a "third way," too. In Great Britain, the "third way" has come to be associated with the politics of Tony Blair, and his break with the old Labour and his creation of New Labour. And Anthony Giddens, one of the most influential advisers to New Labour, used the term as the title for his latest book, The Third Way: The Renewal of Social Democracy (Cambridge, United Kingdom: Polity Press, 1998).

People tend to see authors who favor the idea of a third way as starting from the idea that the only other possible choice is between either a capitalist or a socialist economic order. From this perspective, the third way seems to be a mixture of both economic systems, the market and central planning. But a closer look reveals this to be false. Roepke, for example, defended the market order against all approaches that used convergence theory, which was popular during his lifetime and which taught that the two economic systems of the bipolar world over the long run would approach one another--that is, that they would converge.

When choosing the notion "third way," Roepke's point was that Western societies suffered from moral decay, from worshipping the large-scale, and--worst--from proletarianization. He declared that 19th century capitalism might have created the modern proletariat, but that socialism was enlarging that class to include the whole of humanity. Salvation would lay in a third choice:

Socialism, collectivism...are after all, only the last consequence of our yesterday; they are the last conclusions of the nineteenth century, and only in them do we reach the lowest point of a century-old development along the wrong road; these are the hopeless final stages toward which we drift unless we act...the new path is precisely the one that will lead us out of the dilemma of "capitalism" and collectivism. It consists of the economic humanism of the "Third Way."

Roepke was a classical liberal fighting for a "humane society"--a society in which the proletariat dwindles, private property is a central institution, individual rights are secure, and not only an economic equilibrium but also a social equilibrium prevails.

But what about the "third way" that is on the agenda of the social democrats? Not much has changed--at least, not much has changed in continental Europe.

Social democratic parties have learned that their old idea to create a New Society run by New Men--that is, people who act only in an altruistic manner--is utopian. Therefore, the parties have moved, largely for opportunistic reasons, toward the political center. They call their new position as "center-left." This should not mean, as they say, a compromise in the middle of the more clear-cut alternatives. On the contrary, the new middle is described as the "active middle" or the "radical center," which implies it is not the same as the "moderate left." The man on the street might have difficulties with this hair-splitting distinction; perhaps this is one of the more hidden aims of this terminology.

But what is the substance of this so-called renewed center-left social democracy? Social justice and emancipatory politics are at the core of its program. For example, it is said that a reformed welfare state has to meet criteria of social justice. That simply means that social democrats want to keep welfare spending high and that they reject the libertarian position to privatize large parts of the welfare state, leaving only a minimal safety net for those who cannot care for themselves.

But how should social justice--whatever that means--be implemented? Of course, to adherents to the "center-left," government should be the agent. Contrary to the classical liberal view and the sustained libertarian critique of the role of government in social and economic life today, the socialist agenda for the state is very long. Just to name a few topics taken from a longer list by Anthony Giddens in The Third Way (p. 70) as to the reasons a government should exist:

  1. the provision of public goods;

  2. the regulation of markets in the public interest;

  3. the fostering of social peace;

  4. the active development of human capital through a central role by the state in the education system, thereby shaping norms and values;

  5. the provision of infrastructure;

  6. the fostering of regional and transnational alliances and the pursuit of global goals; and, finally,

  7. the role as a prime employer in macro- and microeconomic institutions and, especially, in ecological matters.

Despite the fact that the first, third and fifth topic could be on the list of a classical liberal author writing on the agenda of the state, this is simply the old picture of giving de facto unlimited power to the politicians. In the social democratic world, there are only acting high-minded men and women who work in the public interest and who, of course, know what is in the interest of their fellow citizens. The universal welfare state, in a very wide sense, is at the core of the social democratic philosophy. This is what in German is called der Vater Staat--"the state as your father"--taking care and acting always in the interest of his children.

It is difficult to understand this paternalistic view against the background of the emancipatory rhetoric of social democratic parties. In a world that defines the individual as autonomous and free to act so long as his acts do not interfere with the freedom of others, governments should play only a subsidiary role and should not be looked on as instruments that shape and control society. From this view also follows the belief that interventions should be limitless, according to the discretion of those in power. On the contrary, political power should be limited, following strict rules and respecting narrow boundaries.

Most European Union (EU) member-states are under social democratic governments today. Therefore, a short glimpse of how they act in parochial affairs might be interesting. The dominant problem in the EU--with the exception of Great Britain, Austria, and the Netherlands--is high rates of unemployment. A total of 20 million people are without jobs; major EU countries have double-digit unemployment rates. How do their social democratic governments react? For example, in Germany, the answer is corporatism, not structural reform. The catch phrase is "alliance for work" (Bündnis für Arbeit). Germany may restructure its highly centralized wage-setting system according to the views held by Chancellor Schroeder--as a permanent conference among the unions, the representatives of entrepreneurial associations, and the federal government. In this conference, the delegates will decide how to reduce unemployment. On the agenda of "alliance for work" are initiatives to reduce and standardize the work week not only in France and Germany but also in the entire internal European market to 35 hours; lowering and standardizing the retirement age, thereby reducing the size of the labor force; increasing public-sector investment; harmonizing government tax and spending levels; and expanding government-run labor-market programs.

Not many German economists back that program. The majority of economists warns the government that the outcome of such policies may be the opposite of what is intended--namely, a dramatic increase in, instead of the lowering of, the rate of unemployment. But European politicians are convinced that the new euro will allow them to return to old Keynesian methods of steering their economies according to the aim of full employment without taking recourse to market-oriented reforms in their sclerotic labor markets.

The social democratic "third way" model is not a disguised libertarian program. It does not describe a new chapter in social democratic thinking and ideology. In contrast to the views taken by those who favor a free society, the starting point of "third-way" adherents is not the freedom of the individual but the collectivistic ideas that are alive still in the background of socialist thinking. Therefore, the collective--not the individual--is important; the politician--not the entrepreneur or the wealth-seeking individual--is at the heart of the socialist design.

I have great doubts that policies based on socialist ideology will prove helpful in meeting the challenges with which we are confronted. The social democratic "third way" is a halfway house in which the ideas of the old left remain prominent, and it shows that no full-fledged alternative to contemporary libertarian thinking has been formed yet.

Christian Watrin, Ph.D., is a professor at the Institute for Economic Policy Research at the University of Cologne, Germany.


Christian Watrin

Policy Analyst in Empirical Studies