Ignoring the ‘Third Way,’ Europe Sets Its Own Path

At a recent conference of world leaders on the “third way” at New York University, President Bill Clinton declared that a new economic era had begun. With a grinning British Prime Minister Tony Blair at his side, Clinton explained that whereas Democratic and socialist politicians used to preach the politics of redistribution, now they promoted economic growth for everyone. All the hoopla was supposed to show that a Clinton legacy was in the making and that the U.S. model of a third economic way--something between old-style liberalism and Reaganite capitalism--is being adopted in Europe.

But nothing could be farther from the truth. For all the American triumphalism, most Europeans shun our system. Britain may be closer to the U.S. model, but the two most important countries on the continent--Germany and France--are headed in the opposite direction from the United States, away from capitalism and back toward socialism. In contrast to the 1980s, when conservatives were on top in Europe, socialists now head every government in Europe. The likely result? A clash between the United States and Europe over globalization.

Europe is doing everything it can to avoid following the U.S. path of embracing globalization. Instead of budget cuts, more social-welfare programs. Instead of reducing unemployment benefits, cut the number of working hours.

Indeed, with Europe slated to introduce a common currency, the euro, this January, the centralizing, socialist tendencies of the continent are being greatly strengthened. The European Union, a vast bureaucracy located in Brussels, will become far more intrusive and powerful than ever before. Its mandate will be to resist the pressures of globalization--cutting social benefits and increasing the profits of big business--that the Clinton administration has touted as a panacea for world economics.

Consider the French response to globalization. Prime Minister Lionel Jospin is seen as a socialist soulmate of Blair, but he has been working to avoid the kinds of economic reforms that Britain and the United States have experienced. One of his main goals, for example, is to create a 35-hour workweek. The socialists claim it would lead to more jobs, but the more likely outcome would be that business expenses would rise, with unemployment remaining in the double digits. Labor unions are already gearing up for strikes this winter that will further paralyze the French economy.

Then there’s Germany. After the experience of Weimar-era inflation and the horrors of the Nazi regime, Germans place a premium on stability. But the flip side of stability has been an unwillingness to reform the economy. The election of socialist Gerhard Schroeder to become the new chancellor of Germany is, in many ways, a sign of no new third way. The fact is, the Germans like the way they have, with lavish social benefits, job protection and generous sick leaves.

Schroeder defeated Christian Democrat Helmut Kohl, who had been chancellor for 16 years, by declaring it was time for a change. But like his coalition partner, the environmentally minded Greens, he opposes any harsh economic measures. Germany, like France, is experiencing seemingly intractable, double-digit unemployment. Schroeder is already retreating from measures to jump-start the economy, such as slashing taxes or cutting government services. Why change a cozy way of life that keeps people on the dole fairly content and has ensured social stability? The last thing Germans want are homeless people and the destitute areas that dot U.S. inner cities.

So the Social Democrats are reverting to high taxes on industry and the wealthy. The most powerful member of Schroeder’s government is Finance Minister Oskar Lafontaine, who wants to cut interest rates to stimulate the economy, rather than carry out budget cuts. His call for higher taxes on business prompted the Federation of German Industries to call it “worse than everything we had feared.” When I met with spokesman from the federation in Germany soon after the election, in early October, they were still being cautiously optimistic.

The same went for top executives at the Deutsche Bank in Frankfurt. They see the introduction of a single currency as a brake on socialist aspirations across the continent to increase spending. According to the Maastricht agreement on a common currency, member countries are supposed to adhere to a budget deficit comprising no more than 3% of gross domestic product. To reach that limit for the coming year, a number of countries, including Italy, France and Germany, adopted unorthodox measures--selling state firms--or simply cooking the books. In the coming year, socialist governments will be even more tempted to increase spending, thereby increasing budget deficits as well.

What lesson does the talk about a third way in Europe have for the United States? If Europeans tend to shrink from cutting their budgets, the United States has clearly gone too far in the other direction. Clinton tried to stake out a New Democrat, third-way position that shed old dogmas and adopted tougher stances and proposals: cutting welfare, fixing Social Security, tackling Medicaid.

But a backlash is developing in the United States to Clinton’s endorsement of watered-down Republican proposals. Already the volatile stock market is a problem. The huge profits racked up by the wealthy have significantly increased income disparity in the United States. It seems that rags to rags and riches to riches remain the U.S. model. If the economy goes in the tank, look for a reaction against the globalization forces that have prompted firms to slash workers to increase profits and stockholder benefits.

The most likely outcome could be that Europe turns protectionist, shutting out U.S. goods. With a common currency, the European countries could settle for a lower standard of living, but continued job protections. Europe isn’t following an American-led third way. It’s going its own way--and that could spell trouble for the United States.*