Austerity from the Left: Social Democratic Parties in the Shadow of the Great Recession 0192872214, 9780192872210

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Austerity from the Left

Austerity from the Left Social Democratic Parties in the Shadow of the Great Recession Björn Bremer

Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Björn Bremer 2023 The moral rights of the author have been asserted All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2023930922 ISBN 978–0–19–287221–0 DOI: 10.1093/oso/9780192872210.001.0001 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

To my parents, Iren and Klaus

Acknowledgements Writing this book was a journey that I could not have completed on my own. The book originally began as a PhD thesis and my utmost gratitude goes to my supervisor Hanspeter Kriesi. Hanspeter gave me the freedom to choose a topic that I care deeply about and encouraged me to explore it in many different ways. The final product benefited tremendously from his feedback and the many discussions about the economic crisis and social democracy that we have had over the past few years. Most importantly, Hanspeter’s remarkable desire to understand the social world around us was a constant motivation throughout this endeavour. He has become my academic role model, and I will remain forever grateful that I had the chance to work with and learn from him. Innumerable thanks also go to the other members of my thesis committee—Dorothee Bohle, Herbert Kitschelt, and Jonas Pontusson— whose academic work was an inspiration for this book. Their exceptional feedback on the original thesis allowed me to rethink some of the basic assumptions behind my research, and this book would not exist without their encouragement to keep improving. Of course, none of them bear any responsibility for errors in the book, as I inevitably failed to address all of their comments. I am indebted to Reto Bürgisser and Sean McDaniel, who guided my research as reliable and inspiring collaborators. Their contributions to individual parts of this book were critical, and I am very grateful that they generously allowed me to re-use this material from our collaborations. This book would not be the same without them, and I look forward to continuing to work with them in the future. The thesis upon which this book is based was originally written at the European University Institute (EUI), where I was part of a research project studying the political consequences of the Great Recession, the POLCON project. I gratefully acknowledge financial support from the European Research Council (Project ID 338875) and the German Academic Exchange Service that funded my position as a researcher in this project. The POLCON project, and the EUI more generally, was the best possible environment to write my PhD thesis and I am indebted to many Florentine colleagues for all their feedback and help: Argyrios Altiparmakis, Abel Bojar, Endre Borbáth, Pepper

Acknowledgements

vii

Culpepper, Koen Damhuis, Philipp Genschell, Theresa Gessler, Lukas Haffert, Anton Hemerijck, Sophia Hunger, Swen Hutter, Ellen Immergut, Jasmine Lorenzini, Giorgio Malet, Julia Schulte-Cloos, Daniel Schulz, Guillem Vidal, and Chendi Wang. The WZB Social Science Centre Berlin and the European Institute at the LSE hosted me during my fieldwork in Berlin and London, while the Hertie School of Governance offered me a refuge to finish my thesis. My thanks go to each institution for their extraordinary hospitality and Wolfgang Merkel, Waltraud Schelkle, Hanna Schwander, and Markus Jachtenfuchs for their kind invitations to spend time in these outstanding research environments. I could not have imagined a better place than the Max Planck Institute for the Study of Societies (MPIfG) to turn the thesis into a book. My colleagues’ unrivalled desire to explain the political economy of contemporary capitalism was the best incentive to keep working on this project. They created an exceptionally stimulating research environment, even when the COVID-19 pandemic forced us to work from home. I am particularly grateful to Lucio Baccaro for giving me the time and space to turn the thesis into a book manuscript and to many other colleagues for reading parts of the revised manuscript: Fabio Bulfone, Donato di Carlo, Erik Neimanns, Martin Höpner, Sidney Rothstein, Mischa Stratenwerth, Arianna Tassinari, and Leon Wansleben. Beyond the institutions where I had the privilege to work, numerous other people contributed to this book. A large number of politicians and policymakers generously agreed to speak with me, providing unique insights into the inner workings of the British Labour Party and the German SPD. Over the years, I was also fortunate to receive insightful feedback on parts of the manuscript from many stellar academics, including Tarik AbouChadi, Despina Alexiadou, Klaus Armingeon, Lucy Barnes, Bob Hancké, Charlotte Cavaille, Marius Busemeyer, Silja Häusermann, Tim Hicks, Josef Hien, Evelyne Hübscher, Erik Jones, Dan Kelemen, Achim Kemmerling, Thomas Kurer, Matthias Matthijs, Line Rennwald, Armin Schäfer, Tobias Schulze-Cleven, and Tim Vlandas. I also thank Dominic Byatt and three anonymous reviewers from Oxford University Press who provided extremely detailed feedback on my first draft. Frances Tye and Sharon Adams helped to make the manuscript readable, while Maureen Lechleitner provided invaluable administrative support during my time in Florence. In the final stages of the project, Robin Hetzel provided the best possible research assistance.

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Acknowledgements

Despite all of this outstanding academic support, writing first a PhD thesis and then a book can be a lonely endeavour, especially during a global pandemic. Countless friends in Florence, Berlin, Hamburg, the Rhineland, and around the entire world provided much-needed distraction, and I am grateful to all of them. Special thanks go to Andreas Winkler, Jens van Straalen, and Lene Korseberg, who were brave enough to live with me in Florence. They were wonderful company, ensuring that I truly felt at home in Italy. Finally, the greatest thanks go to my family. My partner My had to endure endless ramblings about my work and witness periods of doubts and stress. Nonetheless, My still put up with all my quirks and bad habits, lifted my spirits when it was most needed, and showed me that there are many things that are more important than writing this book. Her love has been my greatest source of strength in the past decade. The support from the rest of my family goes back even further. My parents, Iren and Klaus, and my siblings, Torben and Svea, have been my rock throughout my entire life. Their unwavering faith that my work matters was the best possible encouragement to complete it. Especially my parents’ unconditional love and support helped me in good and in bad times, and I could not have written this book without them. It is dedicated to them.

Contents List of Figures List of Tables

1. Introduction

xiii xv

1

Introduction The puzzle and research question Existing explanations for social democratic austerity and their shortcomings Outline of the argument

1 3

The electoral pressures for social democratic austerity The ideational pressures for social democratic austerity Paradigm change, social democrats, and the Great Recession

10 12 14

Research design and methods Outline of the book Extended literature review and theoretical framework The response of social democratic parties to the Great Recession The popular politics of austerity: studying the demand side of politics The elite politics of austerity: studying the supply side of politics The electoral consequences of social democratic austerity

6 9

18 21 21 22 23 24 25

2. Social Democratic Austerity: A Theoretical Framework

26

Introduction Social democratic parties and macroeconomic policies before and during the Great Recession Existing explanations for social democratic austerity A new explanation for social democratic austerity

26

The electoral foundations of social democratic austerity The ideational foundations of social democratic austerity

41 47

Social democratic parties, paradigm change, and the Great Recession Conclusion

3. The Programmatic Response of Social Democratic Parties to the Great Recession Introduction Party positions, issue salience, and the economy

27 34 41

53 58

60 60 61

x

Contents The response of social democratic parties to the Great Recession: some expectations Data and methods Social democratic parties and the crisis: changes in issue emphasis Social democratic parties and the crisis: changes in issue positions Conclusion

63 66 68 72 78

4. Attitudes towards Austerity: Analysing the Public’s Debt Aversion during the Eurozone Crisis

80

Introduction Public preferences towards fiscal consolidation Differences in debt aversion across individuals and countries

80 81 83

Individual-level factors Country-level factors

Data and methods Empirical results Differences in debt aversion across time and space Individual-level correlates Individual- and country-level correlates

Conclusion

5. Public Opinion Regarding Fiscal Consolidation in the Face of Trade-offs: Evidence from survey experiments Introduction Public opinion on fiscal policies: do citizens have inconsistent preferences? Taking trade-offs seriously: from policy positions towards priorities Research design Part 1: experiment with split-sample questions Part 2: conjoint survey experiment

84 86

88 89 89 92 96

99

102 102 104 107 110 111 112

Measuring attitudes towards fiscal consolidation with trade-offs

115

Attitudes towards two-dimensional fiscal policy trade-offs Attitudes towards multidimensional fiscal policy trade-offs

115 120

Conclusion

6. The Fiscal Policies of the British Labour Party in Times of Crisis: Where Have All the Keynesians Gone? Introduction Labour’s economic policies before the Great Recession The reign of Keynesianism: 1945–79 In the shadow of monetarism: 1979–97 New Labour’s symbiosis: 1997–2008

Economic crisis and the response of the Labour Party Explaining austerity from the left in the UK The crisis years—Labour’s response to the financial crisis, 2008–10 The austere years—Labour in opposition, 2010–15

126

128 128 130 130 132 133

136 140 141 148

Contents Discussion: electoral and ideational pressures for austerity in the UK The politics of austerity The economics of austerity Labour trapped and divided

Conclusion Appendix: list of all British interviews

7. The Fiscal Policies of the German SPD in Times of Crisis: The Swabian Housewife of the Left? Introduction The SPD’s fiscal policies before the Great Recession From Marxism to Keynesianism: 1945–74 From Schmidt to Schröder: 1974–99 Germany’s Third Way: 1999–2008

Economic crisis and the response of the SPD Explaining austerity from the left in Germany The crisis years—the SPD’s response to the financial crisis, 2008–10 The austere years—torn between opposition and government, 2009–15

Discussion: electoral and ideational pressures for austerity in Germany The politics of austerity The economics of austerity The SPD trapped and divided

Conclusion Appendix: list of all German interviews

xi 156 156 160 163

165 168

170 170 172 172 173 174

176 180 181 187

197 197 201 204

206 208

8. The Electoral Effects of Social Democratic Austerity

210

Introduction The contested electoral payoffs of centrist strategies The effect of austerity packages on support for social democratic parties across Europe

210 211

Data and methods Results

Support for austerity and propensity to vote for the Labour Party on the individual level in the UK Data and methods Results

Conclusion

9. Conclusion Introduction The argument in summary The electoral foundations of social democratic austerity The ideational foundations of social democratic austerity

214 214 217

219 219 222

226

228 228 229 229 231

xii

Contents Social democracy trapped and divided

232

Social democratic austerity and its political consequences Social democratic austerity and its economic consequences Looking ahead: social democracy after the COVID-19 pandemic

235 238 241

Bibliography Supplementary material for Chapters 3, 4, 5, and 8 is available on a companion site at www.oup.co.uk/companion/Austerity.

248

Index

271

List of Figures 1.1 Average vote share of left-wing parties in Western Europe, 1945–2020

6

3.1 Issue salience of all economic issues by party family, country, and period

69

3.2 Average marginal effect of the crisis on the salience of economic issues

70

3.3 Salience of different economic issues for social democratic parties by country

71

3.4 Average party positions on economic issues by party family and country

73

3.5 Average marginal effect of the crisis on economic positions

74

3.6 Average positions of social democratic parties on different economic issues by country

75

3.7 Average positions of social democratic parties on different economic issues by election type

77

4.1 Share of respondents by debt aversion

90

4.2 Share of respondents by debt aversion in different countries

91

4.3 Predicted probabilities of debt aversion by financial situation

93

4.4 Predicted probabilities of debt aversion by home ownership

94

4.5 Predicted probabilities of debt aversion by left–right ideology

95

4.6 Interaction effect of the budget balance and financial situation on the predicted probabilities of debt aversion

97

4.7 Interaction effect of economic growth and the subjective evaluation of the economy on the predicted probabilities of debt aversion

98

5.1 Distribution of support for higher government spending, lower taxes, and lower government debt

106

5.2 Distribution of support for fiscal consolidation by treatment

115

5.3 Average support for fiscal consolidation by treatment

116

5.4 Support for fiscal consolidation by trade-off and income/partisanship

117

5.5 Support for fiscal consolidation by trade-off and country

118

5.6 AMCEs from conjoint survey experiment

120

5.7 Distribution of the ratings of all fiscal packages by the change in government debt

122

5.8 Estimated marginal means from conjoint survey experiment by income group and partisanship

123

5.9 Estimated marginal means from conjoint survey experiment by country

125

6.1 UK real GDP growth and unemployment rate, 1970–2015

137

xiv

List of Figures

6.2 Left–right position of Labour and the Conservatives over time

138

6.3 Left–right position of the Labour Party for different economic categories over time

139

6.4 UK government spending and revenues, 1970–2015

143

6.5 UK polls, 2005–15

146

6.6 Attitudes towards government debt in the UK, 2010–15

151

6.7 UK interest rates on government bonds, 1960–2015

160

7.1 German real GDP growth and unemployment rate, 1991–2015

177

7.2 Left–right position of the SPD and CDU/CSU over time

178

7.3 Left–right position of the SPD on different economic categories over time

179

7.4 German government spending and revenues, 1991–2015

183

7.5 Attitudes towards government debt in Germany, 2010–15

193

7.6 German polls, 2005–15

198

7.7 Interest rates on German government bonds, 1991–2015

204

8.1 Support for social democratic parties in twelve Western European countries, 2005–17

215

8.2 Average marginal effect of austerity on support for social democratic parties by incumbency

218

8.3 Distribution of attitudes towards spending cuts and the budget deficit by the propensity to vote for the Labour Party

221

8.4 Estimated effect of attitudes towards the budget deficit on the propensity to vote for the Labour Party

223

8.5 Estimated effect of attitudes towards spending cuts on the propensity to vote for the Labour Party

225

List of Tables 1.1 Research design

18

1.2 Logic of case selection

21

2.1 Paradigm change and the interplay of ideas and electoral constraints

53

3.1 List of economic issue categories (adopted from Kriesi et al., 2008)

65

4.1 Debt aversion by ideology

96

5.1 Design of the split experiment

111

5.2 Attributes and levels of the conjoint experiment

113

6.1 List of elections by time period

138

7.1 List of elections by time period

178

1 Introduction Introduction Before the COVID-19 pandemic ravaged the world, the Great Recession ranked as the greatest economic crisis in Europe since the Great Depression.1 The crisis was triggered by the collapse of the American investment bank Lehman Brothers in September 2008, which sent shock waves through the international financial system and created a deep deflationary spiral. The German Finance Minister, Peer Steinbrück, later summarized the feeling that prevailed among the governing elite at that time, saying, ‘we were all looking into the abyss’ (Der Spiegel, 2008). In response to this situation, almost all governments in the advanced economies responded resolutely: they developed far-reaching government programmes in order to save tumbling financial institutions and to maintain output (Armingeon, 2012; Pontusson and Raess, 2012; Skidelsky, 2010). Three decades after the Keynesian consensus had fallen apart in the economic turmoil of the 1970s, policymakers used ‘emergency Keynesianism’ (Hall, 2013) to prevent a depression on the scale of the 1930s. The G20 (‘Group of Twenty’) collectively vowed to ‘use fiscal measures to stimulate demand to rapid effect’, and neoclassical economist Robert Lucas even complained that ‘everyone [was] a Keynesian in a foxhole’ (Fox, 2008).2 However, only a few months after the beginning of the financial crisis, the economic winds changed once more, and austerity came back with a vengeance. The end of the Keynesian era began with the bailout of Greece in May 2010, which was made conditional on the country’s adherence to strict austerity measures. Shortly afterwards, world leaders agreed on ‘growth-friendly fiscal consolidation’ at the G20 meeting in June 2010. According to conventional wisdom, the Greek crisis illustrated the perils of government debt. It undermined arguments for further fiscal stimulus and contributed to a premature 1 The Great Recession is used here as a term that refers to both the 2007–8 financial crisis and the eurozone crisis; i.e. it conceptualizes both crises as one larger economic crisis. 2 Five years earlier, Robert Lucas (2003) had declared in his presidential address to the American Economic Association that such stimulus programmes were no longer necessary because the ‘central problem of depression-prevention [had] been solved’. Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0001

2

Introduction

rush to austerity, especially in Europe. As the ‘American’ financial crisis was reimagined as a ‘European’ sovereign debt crisis, governments of all stripes and colours implemented austerity by slashing government spending and/or increasing taxes. This transformation of a financial crisis into a fiscal one confused cause with effect (Tooze, 2018), but it was the perfect outcome for financial market actors: it diverted attention from the failures of the financial system, as ‘excessive’ levels of government debt came to be perceived as the greatest danger to the international economic system. Subsequently, the pressure was on monetary policy to support demand in Europe. Fiscal austerity was combined with unconventional monetary policies, as central banks devised tools for an unprecedented level of monetary expansion. This protected most economies in Europe from a depression on the scale of the 1930s, but the economic and political consequences of the new macroeconomic regime, which combined austerity with ultra-loose monetary policies, were still dramatic. The eurozone remained in a perpetual state of crisis for several years as Greece, Ireland, Portugal, Cyprus, and Spain had to be bailed out by the International Monetary Fund (IMF) and the European Union (EU) (Walter et al., 2020). Other countries, like Italy and France, also continued to fight deflationary pressures. Output dropped substantially and unemployment reached levels that had never been seen in post-war Europe. For a long time, the European economy operated below its full capacity as the Continent experienced a ‘lost decade’ (Chinn and Frieden, 2011) and a great deal of economic hardship. The crisis created a division between the prosperous North and the struggling South, but popular discontent was widespread across both regions: the debtor countries opposed the northern Spardiktat, while the creditors were unwilling to pay for the perceived lavishness of the South. The economic crisis and the austerity policies that were adopted in response to it, therefore, also created a political crisis: it increased electoral volatility, contributed to a decline of mainstream parties (Bojar et al., 2022; Bremer et al., 2020; Hübscher et al., 2021), and unleashed populist forces across Europe (Eichengreen, 2018; Hopkin, 2020; Kriesi and Pappas, 2015). This dramatic decline in the support for mainstream parties even threatened the stability of party systems (Hutter and Kriesi, 2019) and undermined satisfaction with democracy in Europe (Kriesi, 2018). Despite the economic and political ramifications of austerity, Europe’s political mainstream remained committed to it for a long time. In 2010, austerity became the only game in town and the ‘austerity settlement’, i.e. its dominance across the political spectrum, saw governments throughout Europe, albeit in different contexts and to varying degrees, implement

The puzzle and research question

3

austerity measures for nearly a decade. Austerity, however, shifted the burden of the crisis onto the shoulders of the weakest citizens, and the most surprising element of this settlement is the way in which social democratic parties, both in and out of power, have acquiesced to it.3 At first, the financial crisis presented social democratic parties with a unique opportunity to renew their raison d’être. It highlighted the vulnerabilities of unfettered capitalism and undermined the legitimacy of the existing economic paradigm. Still, social democrats were unable to formulate a coherent intellectual response and largely accepted the shift towards austerity that began in 2009. In ‘debtor countries’, the centre-left bowed to external pressure and accepted austerity as a necessary evil (e.g. Greece, Spain, and Ireland); in ‘creditor countries’, social democratic parties helped to impose austerity on debtor countries and pursued fiscal consolidation at home. For example, in Germany, the Social Democratic Party (SPD) supported the introduction of a constitutional debt brake in 2009 and the balanced-budget policy (Schwarze Null) after 2013. Similarly, the French government increased taxes and reduced public spending after adopting the ‘Pact for Competitiveness’ under socialist President François Hollande. Outside the eurozone, before the 2010 election, the British Labour Party promised cuts that would be ‘deeper and tougher’ than Margaret Thatcher’s (Elliott, 2010), and included a ‘budget responsibility lock’ on the first page of its manifesto in 2015. According to some analyses, social democratic parties became even more likely to implement austerity and retrench the welfare state than the centre-right (Armingeon et al., 2016; Raess, 2021).

The puzzle and research question Social democratic parties’ accommodation of austerity is puzzling for several reasons. First, historically, social democratic parties had built the welfare state in most European countries (Esping-Andersen, 1985; Korpi, 1983; Stephens, 1979), with the aim of protecting the most vulnerable people in society from unfettered market capitalism. The dominant modus operandi of these parties in the post-war period, at least until the late 1970s, was based on Keynesian policies of demand management (Hall, 1989; Przeworski, 1985). By minimizing unemployment (Hibbs, 1977), this strategy allowed the left to limit the adverse effects of free markets on their citizens. Although social 3 Following Kitschelt (1994, p. 1), social democracy is employed as a generic concept that covers ‘a cohort of parties that run under socialist, labour and, social democratic labels’. I will use the terms ‘social democratic’, ‘centre-left’, and ‘moderate left’ interchangeably to refer to these parties.

4

Introduction

democratic parties moved towards the centre at the end of the twentieth century and adopted more liberal economic policies as part of the ‘Third Way’(Giddens, 1998), the ‘essential and enduring’ goal of social democracy was still to minimize the ‘cost of capitalism’ for the working classes (Hirst, 1999, p. 87).⁴ Despite the numerous historical and geographical incarnations of social democracy, its adherents always attempted to decrease social inequality by creating the conditions for (full) employment and a strong welfare state. However, during the Great Recession, austerity challenged both. It contributed to the deflationary spiral in Europe and undermined the fiscal basis of the welfare state that social democratic parties had vigorously fought for in the twentieth century. Second, the Great Recession presented a unique opportunity for social democracy to push for paradigm change after thirty years of economic liberalization. Voters had already punished some social democratic parties for their Third Way policies before 2008, and the crisis would have been an opportune moment for the left to facilitate a countermovement in the spirit of Karl Polanyi (2001). In the past, social democrats were able to do this: in response to economic crises, they developed and implemented new economic ideas (e.g. Berman, 1998; Blyth, 2002). The Great Recession provided a similar opportunity for the centre-left to experiment with new policies and reform the dominant economic order.⁵ Seeking new alliances with actors in politics, social movements, and academia, social democrats could have rallied the left by opposing austerity. Their failure to do so contributed to the ‘strange non-death’ (Crouch, 2011) or ‘resilience’ (Schmidt and Thatcher, 2013) of neoliberalism. Third, a Polanyian-style countermovement became even more likely over time because austerity, arguably, did not work. From a Keynesian point of view, austerity made little sense in the post-crisis context (Blyth, 2013; Blyth and Matthijs, 2017; Sandbu, 2015) and there is growing evidence that it made the crisis worse by contributing to a deflationary spiral (e.g. Blanchard and Leigh, 2013; Heimberger, 2017). It contributed to a low-growth environment, worsening ‘secular stagnation’ (Summers, 2018) tendencies in Europe, which in turn aggravated the fiscal crisis there. It pushed the eurozone towards the ⁴ I use the term ‘Third Way’, coined by Anthony Giddens, to describe a general turn towards centrist policies by social democratic parties at the end of the twentieth century, which is well documented (e.g. Callaghan, 2000; Glyn, 2001; Lavelle, 2008; Pierson, 2001a). ⁵ There was a fleeting moment at the beginning of the crisis when it seemed that social democrats were capable of doing this again. In countries like the United Kingdom (UK), Germany, and Spain, they played a key role in the initial response to the financial crisis, while the election of Barack Obama as US President in November 2008 invigorated progressive forces across the world with hope. They developed a range of demands for new financial regulation and future-oriented investment programmes and were concerned with protecting citizens from the effects of the financial crisis.

The puzzle and research question

5

brink of disintegration (Mody, 2018; Walter et al., 2020) and overburdened monetary policy as the main instrument with which to stabilize demand in Europe. In an era of extremely low interest rates, which made borrowing cheap, governments failed to seize the moment to update crumbling infrastructures, invest in human and physical capital to raise productivity, and embark on the transition to a green economy. Rather, they opted to cut public spending and hike taxes, which choked off the recovery. This created economic grievances, which undermined Europe’s social contract. At least in hindsight, the economic case for a fiscal policy other than austerity seems obvious for the left in such a low-growth environment, in which borrowing is cheap. Finally, the Great Recession also contributed to significant electoral turmoil on the left (Roberts, 2017). While the economic crisis pushed voters into the arms of radical right- and left-wing parties (Hopkin, 2020), social democratic parties were unable to capitalize on the economic crisis. In some European countries, like Greece, France, and the Netherlands, social democratic parties experienced electoral annihilation, but they also lost support dramatically in many other countries, including those as diverse as Germany, Italy, and Finland (Benedetto et al., 2020). Overall, the vote share of social democratic parties in Western Europe dropped significantly in the wake of the global financial crisis, as shown in Figure 1.1. This situation was remarkably similar to that of the 1930s, when many social democratic parties had supported austerity during the Great Depression, also with disastrous consequences.⁶ By prolonging the recession and allowing unemployment to reach record levels, austerity had then divided the labour movement and pushed voters into the arms of fascist parties. In light of this historical experience and the electoral slump of the centre-left following the Great Recession, it is particularly surprising that social democratic parties bought into the austerity settlement again. This book explains why social democratic parties accepted austerity and explores the political consequences of this decision. For this purpose, I define austerity as a macroeconomic policy that aims at fiscal consolidation (i.e. the reduction of government debt) during hard economic times. In other words, in using the term ‘austerity’ I am referring to fiscal consolidation implemented when a given economy is operating below its potential. In theory, such a programme can be achieved in different ways; for example, it might be useful to distinguish between expenditure- and revenue-based consolidations. In practice, however, austerity packages often include ‘some ⁶ For example, Labour Prime Minister Ramsay MacDonald formed a National Coalition government to implement austerity in the UK (Skidelsky, 1970), while the German SPD rejected Keynesian-style policies and supported the austerity measures implemented by the government under Heinrich Brüning (Berman, 1998).

6

Introduction

Vote share (in %)

30

Party family Centre−left Far left

20

10

19 45 19 50 19 55 19 60 19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 05 20 10 20 15 20 20

0

Year

Figure 1.1 Average vote share of left-wing parties in Western Europe, 1945–2020 Note: The figure shows the average vote share that moderate and far-left parties received in nineteen Western European countries. For any given year, the share was calculated by taking the average of the vote share that a given party had received in the last election prior to that particular year. The countries included are Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, Malta, Netherlands, Norway, Portugal, Sweden, Spain, Switzerland, and the UK.

combination of measures to reduce public expenditure and to increase tax revenues and other government receipts (such as the selling off of nonfinancial assets)’ (Konzelmann, 2014, p. 703). Therefore, I do not make such a distinction; rather, I focus on the broad outlines of the economic positions that social democratic parties adopted in the wake of the Great Recession. Put differently, the book focuses on the extent to which social democratic parties supported fiscal consolidation during the economic crisis as a partisan strategy. Rather than focusing on the implementation of austerity measures in government, I seek to determine how and why centre-left parties approached and adopted austerity politically (in government and opposition) and to evaluate the success of this strategy. This focus on the ‘supply’ of politics allows me to disentangle the distinctive social democratic element of the austerity settlement in the wake of the crisis.

Existing explanations for social democratic austerity and their shortcomings There are several existing approaches in the literature that could explain ‘austerity from the left’ or ‘social democratic austerity’, i.e. the broad acceptance of austerity by social democratic parties in post-crisis Europe. The most

Existing explanations for social democratic austerity

7

prominent explanation focuses on the structural imperatives of the global economy. Some scholars contend that the collapse of the Bretton Woods system and end of the post-war economic boom that accompanied the subsequent oil crises effectively killed off social democracy by ruling out the use of traditional Keynesian policy tools (Bailey, 2009, p. 606; Lavelle, 2008; Panitch and Leys, 2001, p. 107; Rogers, 2013, pp. 8–9). Others point to the rise of globalized capital markets in the 1980s—which were said to empower footloose capital to punish inflationary economic policies—to explain the ‘death’ of social democracy. Most prominently, Scharpf (1991, p. 24) argued: ‘there is now no economically plausible Keynesian strategy that would permit the full realisation of social democratic goals within the national context without violating the functional imperatives of a capitalist economy’. Wolfgang Streeck (2014) has more recently updated this thesis, arguing that the secular trends of stagnating economic growth, shrinking tax revenues, and rising public debt have made sovereign governments increasingly vulnerable to the whims of financial market actors who can impose strict austerity via the threat of capital flight. Relatedly, critical perspectives on European integration have explored the role of the EU in institutionalizing a ‘disciplinary neoliberalism’ (Bailey, 2009; Gill, 2003, pp. 65–7), including through post-crisis developments such as the Fiscal Compact (Bailey, 2014, p. 245; Escalona and Vieira, 2014, p. 26). These accounts point to significant challenges for social democratic parties, but globalization did not make their preferred policies impossible. The economic globalization thesis of the 1990s and 2000s ignored ongoing differences between national economies. Countries continued to exhibit different varieties of capitalism (Hall and Soskice, 2001) or growth models (Baccaro and Pontusson, 2016; Baccaro et al., 2022), and governments could still pursue different economic policies (Boix, 1998; Garrett, 1998a). This was not only limited to supply-side policies; different countries were also able to mediate the pressures associated with globalization in order to pursue Keynesian policies (Clift and Tomlinson, 2007). Governments such as the British Labour government of 1974–9 pragmatically adjusted to the monetarily constrained post-Bretton-Woods environment without sacrificing all the elements of their Keynesian programmes (see Crook, 2018; Hay, 1999, pp. 209–12). Moreover, the return of emergency Keynesianism in the immediate wake of the financial crisis demonstrated that expansionary fiscal policy was still an effective part of policymakers’ toolkits (Raess and Pontusson, 2015). Second, it is not evident that financial markets have imposed austerity since 2008. In an otherwise toxic environment, post-crisis interest rates on

8

Introduction

government bonds plummeted in many of Europe’s major economies as capital desperately searched for safe assets. As a result, governments in countries such as Germany, France, and the United Kingdom (UK) were able to borrow cheaply despite high levels of debt. In fact, in 2010, market actors came to perceive the fiscal position of some European governments as fragile only because the role of the European Central Bank (ECB) as lender of last resort was not guaranteed (De Grauwe, 2013b). They did not demand austerity per se, but rather a credible backstop that would safeguard their assets. When ECB President Mario Draghi provided this backstop in 2012, promising to do ‘whatever it takes’ to save the euro, the financial pressure on Europe’s periphery receded but austerity continued. Austerity was thus more a political choice than an economic necessity. Finally, EU integration is not sufficient to explain the austerity settlement either. Even if the conditions of bailout agreements necessitated austerity in debtor countries such as Greece, the same argument cannot be made in many other countries where it was imposed. In creditor countries like Germany, France, and the Netherlands, governments had more room for manoeuvre. Moreover, even the UK government committed itself to an austerity programme on a par with those of Portugal and Spain in 2010 without being forced to do so. The UK has its own currency and central bank and even before its exit from the EU, it was not subject to the rules of the eurozone in the same way that other EU members were. Instead, the extent of the austerity measures in the UK can only be explained by the ideological disposition and political strategy of the Conservative-led coalition government (Gamble, 2015). Yet even the literature attuned to the importance of ideas cannot fully explain social democratic austerity. This constructivist literature views austerity as the result of the dominance of neoliberal or ordoliberal ideas (e.g. Baker, 2015; Ban, 2016; Blyth, 2013; Blyth and Matthijs, 2017; Carstensen and Matthijs, 2018; Dellepiane-Avellaneda, 2015; Matthijs and McNamara, 2015) which also influenced social democratic parties (Mudge, 2018). It demonstrates that the concept of austerity is underpinned by a range of normative and economic notions about the appropriate role of the state vis-à-vis markets. Some argue that neoliberal economic ideas, including the ‘crowding-out’ effect of government borrowing (Barro, 1974) and the alleged ‘expansionary’ effect of fiscal consolidations (Alesina and Ardagna, 1998; Giavazzi and Pagano, 1990), have shaped austerity. Others argue that ordoliberal ideas, including a rule-based approach to economics and the ‘moral hazard’ associated with government debt, have contributed to the dominance of austerity in Europe. In perhaps the best-known account of post-crisis austerity, Blyth

Outline of the argument

9

(2013) artfully traces a range of ideational developments before the crisis and shows that, in fact, a symbiosis or a cocktail of these ideas underpins the ways in which its actors engaged with austerity. These approaches are useful because they highlight how economic ideas have fed into the post-crisis politics of austerity. However, to date, the literature has been unable to effectively explain why austerity was not challenged by other economic viewpoints. In countries outside of Europe, governments, indeed, pursued alternative economic policies, and it remains unclear why other economic ideas gained so little traction in Europe after 2010. In particular, in focusing on neo- and ordoliberal ideas, the existing literature potentially delimits our understanding of why social democratic parties embraced fiscal consolidation.⁷ Historically, social democratic parties were neither associated with neo- nor ordoliberalism. They developed from a distinct intellectual tradition, which still influences these parties to this day. Nonetheless, social democratic parties adopted strategies that embraced an element of austerity both prior to and during the crisis (see Chapter 3). Why did the left not articulate an alternative that challenged the dominance of austerity? Overall, the existing literature provides several starting points to explain the austerity settlement, which are more fully reviewed in Chapter 2. These approaches generate valuable insights, but none of them provide a sufficient explanation for austerity from the left. Unless our conception of social democratic austerity boils down to suggesting either that social democratic parties had little choice but to accept austerity or that such actors have merely accepted a neo- or ordoliberal economic outlook entirely, it is clear that social democratic austerity requires another explanation. Even today, we still have a limited understanding of the ways in which social democratic actors have come to engage with, understand, and ultimately embrace austerity policies, and this book addresses this shortcoming of the existing research.

Outline of the argument My explanation of social democratic austerity is based on the premise that austerity was a political choice and that political actors, including parties, influence the governance of advanced economies. Fiscal policies are not only a matter of economic necessity, but are at the heart of politics itself. In the words of Peter Gourevitch (1986, p. 19), ‘to understand policy choices …we must understand the politics that produces them’. ⁷ For important exceptions, see Mudge (2018) and Hindmoor (2018).

10

Introduction

This is especially true in the context of economic crises, including the Great Recession. Such crises are often ‘critical junctures’ (Capoccia and Kelemen, 2007; Collier and Collier, 1991) that open up the political space. They shake the foundations of the political system and lead to a great deal of uncertainty, which allows policy entrepreneurs to engineer change. Crises can provoke actors to shed previous policy commitments and force them to seek new solutions (Kahler and Lake, 2013, p. 10). As actors need to make decisions that lie outside the normal pattern of politics, agency and contingency come to the fore (Capoccia and Kelemen, 2007). Since parties serve to articulate the interests of different social groups and classes (Hopkin, 2020, p. 23), we need to study austerity as a partisan strategy and understand the political conflicts behind it. To this end, my theoretical framework integrates two distinct perspectives. It combines an approach based on ‘the political sociology of political economy’ (Gourevitch, 1986) with an approach that takes the role of ideas seriously. Put differently, this book explores the interaction of the electoral and the ideational foundations of social democratic austerity and studies its political consequences. Following Beramendi et al. (2015), it highlights that parties are strategic actors that are constrained by the institutional ecologies that they inhabit. They are, first and foremost, guided by electoral considerations and use economic policies as the bedrock of electoral strategies that allow them to build political coalitions. Still, parties are not just conveyor belts for electoral interests; they are also rooted in distinct ideological traditions. My framework, therefore, stresses that economic policies are also influenced by the ideas that parties hold about how the economy works (e.g. Blyth, 2002; Hall, 1989; Widmaier, 2016). This is particularly true during economic crises, when ideas provide explanations of what has gone wrong and how to fix it (Blyth, 2002; Matthijs, 2011; Widmaier et al., 2007).

The electoral pressures for social democratic austerity Traditionally, political economy focuses on the interests and ideas of elites and largely ignores electoral politics. However, during economic crises, this approach is not tenable because ‘mass politics trumps interest group politics when both come into play’ (Hooghe and Marks, 2009, p. 18). Supply-side explanations might explain politics on non-salient issues, which are in the realm of quiet (Culpepper, 2011) or ‘technocratic politics’. Yet, the demand side becomes important for salient issues, which are in the zone of loud or ‘electoral politics’ (Busemeyer et al., 2020). In this case, policies are chosen

Outline of the argument

11

by politicians and ‘when politicians make choices …their choices are constrained by the need to mobilize or retain support’ (Gourevitch, 1986, p. 19). This is particularly true of fiscal policies, which are less insulated from party politics than other economic policies, including monetary policy or financial regulation. They have significant distributive consequences, they are highly visible, and they receive a lot of media attention. Consequently, the supply of fiscal policies is not independent of the demand for them: while politicians can shape and influence public opinion to some extent, they are also its servants. To explain social democratic austerity, it is necessary to take electoral politics seriously (Beramendi et al., 2015) and to focus on the strategic choices that party leaders faced in the context of the Great Recession. We have to explore the interdependence between political economy and electoral politics (Kitschelt, 1999, p. 318), analysing how party leaders cope with voters’ changing demands. Party leaders are political animals, and their actions are guided by their short-term electoral instincts. As they compete in elections, they carefully craft their programmes with reference to electoral considerations. They stay closely tuned to the dominant policy mood (Erikson et al., 2002) or the ebb and flow of public opinion (Soroka and Wlezien, 2010), and in recent decades, this has been especially true of social democratic parties. During the Third Way era, these parties adopted a technocratic and managerial approach to politics, viewing being in office as a means to reform free-market capitalism. In the context of the Great Recession, this ‘instrumental’ approach to politics also shaped the centre-left’s programmatic response to the crisis. On the one hand, low-income households, which social democratic parties aim to represent, were particularly at risk during the crisis. Expansionary fiscal and social policies protected them in its immediate aftermath. On the other hand, the financial crisis was widely narrated as a crisis that had resulted from excessive liberalization of the financial system. This presented centre-left parties with a window of opportunity to oppose economic liberalism and distance themselves from the causes of the Great Recession. They shifted to the left on issues relating to both welfare and economic liberalism, thereby retracting large parts of their Third Way programme. However, when the financial crisis turned into a fiscal crisis of the state, leading European policymakers began to demand the implementation of austerity. The case of Greece set the tone of the debate because the crisis quickly came to be described as one that had been caused by excessive levels of government debt and ‘irresponsible’ behaviour by governments. Since it was no longer viewed as a ‘crisis of growth’ but as a ‘crisis of debt’, the salience of

12

Introduction

public debt dramatically increased. This presented social democratic parties with a fundamental dilemma: their programme—that of protecting and expanding the welfare state—might have been popular but was not perceived as credible. As public deficits became a taboo (Lynch, 2020), reducing government debt was seen as ‘common sense’. Public perceptions had been shaped by decades of media coverage, political discourse, and economic ‘folk theories’ (Rubin, 2003), which ensured that fiscal consolidation resonated more with the public than Keynesian deficit spending. Social democrats had to respond to the changing political discourse following the first Greek bailout. As the crisis was reframed as a sovereign debt crisis, they supported austerity in order to appear electable and fit to govern. Based on the firm belief that the path towards power leads through the centre, they tried to appeal to centrist voters. They thought that these voters were fiscally conservative and that they therefore needed to establish their fiscal credibility (Kraft, 2017). Especially in countries where social democratic parties were in power when Lehman Brothers collapsed, the financial crisis had hurt the perceived economic competence of these parties. They hoped orthodox fiscal policies would help them (re)gain economic competence and close the ‘credibility gap’ by establishing their hawkish credentials. Operating from a defensive position, they adopted fiscally orthodox policies as a cornerstone of the social democratic electoral strategy.

The ideational pressures for social democratic austerity The electoral pressure to espouse austerity created a difficult situation for social democrats: while they perceived voters to be fiscally conservative, austerity policies hurt their traditional supporters and undermined the welfare state. However, parties are not only rational office-seeking actors; they can also craft party programmes in different ways in order to combine heterogeneous demands into a single political platform. Moreover, their economic policies respond to public opinion and the interests of their main constituencies, but—at least in the medium-to-long run—this demand is not independent of the supply. Politicians, therefore, have some degree of freedom to shape and aggregate public opinion. However, the importance of different electoral pressures is mediated by the ideas that politicians hold. These ideas shape the way decision-makers understand crises and the possible responses available to them. They serve to legitimize policies and allow actors to articulate their demands. To explain

Outline of the argument

13

the reluctance of social democratic parties to challenge the austerity settlement, it is, therefore, also necessary to understand the ideational pressures for austerity. As argued earlier, the existing research focuses on neo- or ordoliberal ideas as ways to understand post-crisis economics. Even during the height of monetarism, most social democrats did not really buy into these ideas (Hindmoor, 2018), but it is true that they came to accept the dominance of the market as the fundamental mechanism of economic allocation after the end of the Cold War (Mudge, 2018). Following the economic crisis of the 1970s and 1980s, there was a widespread belief among social democrats that they could neither spend their way to growth nor to equality. They abandoned traditional Keynesian demand management. Instead, they drew on an alternative set of normative and economic ideas, based on New Keynesian theory and supply-side economics, which underpins the way in which social democratic actors have engaged with austerity. Based on a synthesis of new classical and Keynesian arguments, New Keynesianism suggests that macroeconomic policies should maintain output in response to economic crises. Macroeconomic stabilization, however, is said to only be effective in the short run. On top of this, New Keynesianism holds that demand management is best achieved by monetary policy, and not fiscal policy. It justified the rise of independent central banks and prescribed a much more limited role for fiscal policy. Towards the end of the twentieth century, social democrats accepted these ideas and became more sceptical of using fiscal policy to fine-tune economic demand. Instead, they used insights from supply-side economics to argue for an active role of the state in governing the economy. Based on endogenous growth theory (Romer, 1994) and the social investment paradigm (see e.g. Hemerijck, 2017; Morel et al., 2012), the centre-left argued that the state has a fundamental role in the creation of wealth. Yet, for the state to play this role, it needs to retain the capacity to act in the long run. Fiscal policy thus needs to be concerned with the sustainability of public finances, which leads to what Haffert and Mehrtens (2015) call the ‘progressive consolidation thesis’. According to this view, public debt undermines the sustainability of the welfare state and constrains politicians’ ability to invest and deliver the services essential for generating growth. Accumulating debt is said to be a burden on future generations because it foreshadows painful spending cuts and makes states subject to pressures from financial markets. To avoid both, consolidation is an important element to ensure the viability of the state; in other words, ‘consolidation is not an end in itself but a means to regain fiscal capacity’ (Haffert and Mehrtens, 2015, pp. 120–1).

14

Introduction

Internal cognitive pressures, therefore, bounded the choices of social democrats (Berman, 1998) and limited their imaginations. Lingering economic ideas ensured that they interpreted the crisis more through the lens of the 1970s than that of the 1930s. They accepted a structural explanation of the crisis, emphasizing competitiveness and supply-side problems as its cause and paid little attention to the lack of aggregate demand. Contrary to the existing literature (e.g. Mudge, 2018), my account stresses that the ideational foundations of social democratic austerity remained distinct from neo- and ordoliberal austerity. Policies such as austerity can mean different things to different actors, who draw upon and use a variety of ideas to justify their policy programmes (Ban, 2016). Ideas can be differently absorbed in different contexts (Blyth, 2002; Matthijs, 2011), and establishing that a distinct set of ideas provides the intellectual framework for social democratic austerity is important for understanding the pervasiveness of austerity in Europe.

Paradigm change, social democrats, and the Great Recession Acknowledging that there was a complex entanglement of electoral and ideational pressures for austerity still begs the question of why social democratic parties were not able to move beyond them. Following a Kuhnian logic, Peter Hall (1993) suggests that paradigm change occurs when anomalies accumulate that the dominant theory cannot explain. Given that austerity policies did not work and that they hurt traditional social democratic constituencies, the literature on social democracy is rightfully puzzled by the social democratic response to the crisis (e.g. Bailey et al., 2014; Coates, 2017; Keating and McCrone, 2013). It cannot explain why social democratic parties were unable to push for paradigm change in the shadow of the Great Recession. To explain why this happened, this book rethinks the question of when paradigm change is likely. It brings back politics and re-evaluates the conditions that lead to economic policy output. In the short run, paradigm change is constrained by public opinion and the prevailing political discourse. In most circumstances, vote- and office-seeking politicians are not the right people to push for paradigm change. They have to work with preferences from the electorate that are shaped by the legacies of their previous policies and programmes. In this context, paradigm change cannot happen if voters do not want it to happen. Politicians can only strategically move their position in the existing issue space, positioning themselves vis-à-vis other parties. In

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15

the medium-to-long term, politicians and other elites have a greater degree of freedom, however. They can create coalitions against the existing paradigm by pointing out its shortcomings and proposing an alternative prism through which to interpret the economy. This process takes time, but it relies on the existence of leaders who play with new ideas that rally voters against the previous paradigm and shore up support for the new paradigm. Social democratic parties were unable to take up this role in the immediate aftermath of the 2007–8 financial crisis because they were trapped and divided, which undermined their ability to push for ideational renewal. In the absence of a clear new economic paradigm, they combined short-term strategic considerations with technocratic policy initiatives and convinced themselves that austerity was necessary. The problem for social democratic parties was twofold. First, they faced an electoral trap resulting from path dependency. Structural changes had changed the electoral constituency of social democratic parties (Kitschelt, 1994; Piketty, 2020; Rueda, 2007), but this was compounded by the policies that these parties had implemented before the crisis. In general, previous policies have distributive consequences, including the potential to fragment and divide the electorate (Esping-Andersen, 1985, p. 322). Prior to the Great Recession, this is what happened as a result of the Third Way. Many workingclass voters had abandoned social democratic parties, and, in the shadow of the crisis, the complex task of building electoral coalitions became more difficult. Social democrats were squeezed between an (anti-austerity) far left and a (pro-austerity) centre-right and faced a dilemma that was not unique in the history of social democracy: either to promise austerity policies that would appeal to the median voter but contribute to their own long-term decline or to adopt policies that opposed austerity but that would keep them out of power.⁸ Second, social democrats also faced an ideational trap because the implementation of certain ideas and policies before the crisis had destroyed alternatives (Galbraith, 1958). At the beginning of the crisis, observers expected the financial crash to undermine the dominant intellectual edifice. Yet, in the short run, the crisis only led to a narrow debate about the merits of finance. Although the 2010s were a period of flux in macroeconomic thinking, the basic macroeconomic paradigm remained intact for some time.⁹ Policymakers were able to prevent the Great Recession from turning into another ⁸ For a similar argument for different time periods, see Kitschelt (1994, pp. 93–4) as well as Luebbert (1991, pp. 227–32). ⁹ Arguably, and as discussed in the Conclusion, the COVID-19 pandemic and the subsequent return of inflation contributed to a more fundamental rethinking of macroeconomics.

16

Introduction

Great Depression, and the perceived success of the immediate response to the crisis undermined the intellectual renewal that some had expected at its beginning. For social democratic parties, this ideational trap was made worse by the experience of the eurozone crisis. While the economic pain for the crisis-ridden debtor countries only really started in 2010, other countries like Germany bounced back relatively quickly. Conventional wisdom attributed this success to Germany’s Agenda 2010, which was a set of supplyside reforms that the centre-left government had implemented in the early 2000s. The crisis was thus portrayed as a crisis of debt and competitiveness rather than a crisis of demand. This made it difficult for social democrats to disavow supply-side Keynesianism, as they remained trapped by their previous economic ideas and discourse. Witnessing a remarkable expansion of unconventional monetary policies, they accepted that central banks should do the heavy lifting to fight low growth, embracing orthodox fiscal policies. The problem for social democratic parties was compounded by deep internal divisions, which are common on the left (Watson, 2015). Actors from the left wing of these parties opposed austerity, while centrist social democrats held onto supply-side Keynesianism and the progressive consolidation thesis. Left-wing factions, however, had been marginalized within their parties in the 1990s and early 2000s. They lacked the necessary leadership to turn these parties against the austerity settlement. Rather, social democrats leveraged strategic considerations focused on public opinion to win the intra-party conflict. They argued that social democratic parties had to play sensibly to voters’ concerns about government deficits and debt and presented austerity as a policy that was ‘good’ in economic terms (because it safeguarded the ‘fiscal capacity’ of the state) as well as in political terms (because it enhanced the ‘fiscal credibility’ of their programme). As a result, in most countries, opposition to austerity was mobilized by forces outside the traditional social democratic parties, for example by Syriza in Greece, Podemos in Spain, and Jean-Luc Mélenchon’s movement in France. Social democratic austerity was not inevitable, though. Anti-austerity positions were popular among left-wing voters and party members, and in some countries, left-wing factions within social democratic parties were able to win the intra-party conflict over time, for example in Portugal and the UK. These actors were able to push for an anti-austerity platform and eventually moved from the outskirts of their parties to the leadership.1⁰ Even in countries where this happened, however, it was a slow process. This not only serves to remind 1⁰ See Chapter 6 for an analysis of the British case.

Outline of the argument

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us that paradigm change takes a long time but also highlights that the social democratic dilemma was difficult to overcome: anti-austerity policies were popular but were not perceived as credible in the context of the sovereign debt crisis. The problem was that in its search for economic credibility, the centre-left converged with the centre-right. This undermined the functioning of democracy, as voters were offered little choice by mainstream parties on one of the most important policy questions of the time (Mair, 2013; Streeck and Schäfer, 2013). Moreover, as social democrats watered down their economic programme, they diluted their brand (Lupu, 2016). Although centre-left parties often lose as a result of economic crises in the short run, they can benefit from them in the long run (Lindvall, 2014). Embracing austerity during the Great Recession undermined this because it alienated many (potential) social democratic voters. As austerity developed its full force, it subverted the welfare state and caused widespread economic grievances. In this context, it was no longer sufficient for social democratic parties to combine centrist economic policies with progressive cultural policies, as they had successfully done during the Third Way (Abou-Chadi and Wagner, 2019). Voters no longer knew what these parties stood for and what economic policies they would pursue, as contradictions emerged within their programme. Consequently, austerity failed as an electoral strategy (see Chapter 8). As much as parties tried to win over voters by moving to the centre, they alienated some on the left and failed to persuade some of those they were aiming to move towards. Many potential centrist voters did not believe that the centre-left would be best at fiscal consolidation, while the parties’ core voters opposed austerity and turned away in disappointment. Similar to an earlier process in Latin America (Lupu, 2016; Roberts, 2014), this contributed to an electoral crisis of social democracy in Europe. This book thus argues that social democratic parties need new economic ideas and electoral strategies to address this crisis. In the wake of the COVID19 pandemic, which has led to the highest level of borrowing outside of wartime, social democratic parties need to confront their programmatic contradictions head-on and set about redefining their brand. As the fight over budgetary priorities could intensify again in the wake of the pandemic, they need to carve out an economic programme that is capable of building new electoral coalitions and gives new meaning to the entire social democratic project.

18

Introduction

Research design and methods To make this argument, the book uses a mixed-method research design, with each chapter adding a new layer from a different (but related) analytic perspective. It draws on a wide variety of data, and it is divided into four parts, as summarized in Table 1.1. The first part asks whether and how the programmatic claims of the centreleft with regard to the economy have changed during the crisis. It uses the economic policies of social democratic parties as the dependent variable and aims to provide a comprehensive description of the social democratic response to the Great Recession. In particular, it analyses the programmes of social democratic parties in three different issue areas (welfare, economic liberalism, and budgetary rigour) and focuses on both the salience that these parties attribute to economic issues and the positions that they adopt towards these issues. For this purpose, it uses quantitative content analysis, relying on a large data set that records the positions of parties in election campaigns Table 1.1 Research design Analytical steps

Questions

Method

Data

Puzzle

1) What economic policies did SD parties adopt?

Quantitative content analysis

Media data from election campaigns

Survey analysis

Eurobarometer surveys; online survey experiments

Qualitative process tracing

Elite interviews

Time-series and survey analysis

Opinion polls; British election study

2) How did their positions change in response to the crisis? Demand-side

1) What is public opinion on fiscal consolidation? 2) What makes people more likely to be fiscally conservative?

Supply-side

1) What did SD politicians and policymakers think? 2) How important were electoral and ideational concerns for them?

Electoral effects

1) What were the electoral consequences of social democratic austerity?

Research design and methods

19

through core sentence analysis. The data come from the manual coding of newspapers in eleven Western European countries (Austria, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Switzerland, and the UK), following the approach used by Kleinnijenhuis and Pennings (2001) and Kriesi et al. (2008, 2012). Descriptive analysis and time-series cross-section (TSCS) analysis are then used to explore the data. The second part of the book studies the demand side of politics. It analyses public preferences regarding fiscal consolidation as the dependent variable for evaluating how strong the electoral pressure for austerity was during the crisis. To this end, I first use data from existing surveys to study preferences for fiscal consolidation across Europe. In particular, I pool responses from twelve waves of the Eurobarometer and use regression analysis to examine country- and individual-level determinants of ‘debt aversion’. However, existing surveys—like the Eurobarometer—that include questions about preferences regarding fiscal consolidation are problematic. They do not acknowledge that austerity is potentially costly, i.e. that it is associated with the cutting of (welfare state) spending or the increase of taxes. While many respondents might in principle agree that balanced budgets are desirable, it is not clear whether they are also willing to accept the trade-offs associated with them. Hence, I also use data from a split-sample experiment and a conjoint survey experiment (conducted in Germany, Italy, Spain, and the UK), in which respondents were asked to evaluate different fiscal policy packages. This allows me to further explore preferences for fiscal policies and to evaluate how constrained social democratic parties were in the context of the economic crisis. The third part studies the supply side or the ‘elite politics’ of fiscal policies. It uses case studies to explain the fiscal policies that the British Labour Party and the German SPD adopted in response to the Great Recession. The focus of these case studies is not on the actual implementation of austerity measures in government; rather, the case studies explain party strategies in the wake of the Great Recession. As argued earlier, they attempt to determine a broadly ‘social democratic’ element of how these parties approached and internally legitimized austerity. Importantly, the British Labour Party and the German SPD are used as ‘crucial case studies’ because in both countries the external constraints that political parties faced during the Great Recession were weaker than in other European countries. Even before Brexit, the UK was not part of the eurozone and was subject to less control from Brussels than other European countries, while Germany emerged as the dominant country during the euro crisis. Furthermore, interest rates on government bonds remained extremely low in

20

Introduction

both countries, as investors looked for safe havens in the wake of the financial crisis. This allowed these countries to finance government debt very cheaply, which meant that market pressures for austerity were effectively absent in both Germany and the UK. This should have given politicians in these two countries more freedom to adopt the fiscal policies of their choice, at least compared to the crisis-ridden debtor countries. And they would have had good reason to embrace more expansionary fiscal policies, as both of them experienced a sharp decline in economic output in the wake of the financial crisis. Although unemployment never reached the heights seen in some southern European countries, their economies only recovered slowly from the crisis. Both economies were still running below their potential in 2010, when Europe’s governments turned towards fiscal consolidation, and economic growth remained low for some, as Germany confronted a massive investment gap while the UK suffered from low economic productivity. In hindsight, policymakers should have borrowed much more to finance public investments. Still, in both countries, social democratic parties largely accepted conservative fiscal policies and supported voluntary fiscal consolidation. In Germany, the SPD was instrumental in the introduction of the German constitutional debt brake in 2009, which was an early sign of the fiscal orthodoxy that would haunt Europe in the following years. Afterwards, the SPD supported this path of fiscal consolidation, irrespective of whether it was in opposition (from 2009 to 2013) or in government (from 2013 onwards). It supported almost all the measures (such as the balanced-budget policy, the Schwarze Null, and European bailout packages) that the government introduced in response to the eurozone crisis and which enforced austerity across Europe. In the UK, Labour lost the general election in 2010 and it was in opposition when David Cameron implemented austerity. Still, prior to the general election, the Labour Party had already endorsed the so-called ‘Darling Plan’, which called for substantial fiscal consolidation and which helped to frame the economic discourse in the UK for years to come. In opposition, under Ed Miliband, the party then struggled to define its own fiscal policy, but eventually, it continued to support fiscal consolidation, advocating deficit reduction and ‘iron discipline on spending’. This support for austerity among the centre-left cannot be explained by structural forces, given that Germany and the UK diverge on many different dimensions, as summarized in Table 1.2: they have different economic systems, they operate in different political systems, and their social democratic parties had different positions in government at the time of the crisis. This leads to a ‘most different systems design’ (Przeworski and Teune, 1970),

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Table 1.2 Logic of case selection

Strategic position Fiscal position Market pressure Variety of capitalism* Growth model** Electoral system Government responsibility***

Germany

UK

Core of eurozone (creditor) No fiscal problems No market pressure CME Export-led growth

Outside of eurozone

Mixed-member proportional representation G⇒O⇒G

Some fiscal problems Some market pressure LME Consumption-led growth First-past-the-post G⇒O

Explanatory variables

Electoral constraints & economic ideas

Electoral constraints & economic ideas

Dependent variable

No challenge to austerity

No challenge to austerity

* Adopted from Hall and Soskice (2001). ** Adopted from Baccaro and Pontusson (2016). *** Govt. responsibility of SD parties from 2008 to 2015 (G = govt.; O = opposition; ⇒ = change).

which allows me to test whether my theoretical framework can explain the policies that the German SPD and the British Labour Party adopted. To this end, I use process tracing, primarily based on evidence from more than forty interviews with leading policymakers in both Germany and the UK. Interviewees were selected by combining a ‘purposive’ sampling method with a ‘chain’ or ‘snowballing’ method. They included former cabinet members, budgetary spokespeople, and a range of high-level economic and political advisers. Finally, the fourth part studies the electoral consequences of social democratic austerity. It uses monthly time-series analysis from twelve countries to examine the impact of implementing austerity on the electoral popularity of social democratic parties in monthly opinion polls. Further, it uses individual-level panel data from the UK before the 2015 election to examine the electoral effects of adopting orthodox fiscal policies during election campaigns.

Outline of the book Extended literature review and theoretical framework Concretely, this book is divided into nine chapters. Chapter 2 situates this work in the context of the existing literature on political economy and party

22

Introduction

politics and outlines the analytical framework. The chapter begins by reviewing the policies that the centre-left pursued before the Great Recession. Afterwards, it discusses the various theories that can be used to explain austerity from the left in the context of crisis. It provides a more comprehensive assessment of these explanations and argues that they are not sufficient to explain this phenomenon. Therefore, the chapter offers a new explanatory framework that combines two different approaches. The framework attempts to bring the ‘electoral turn’ (Beramendi et al., 2015) to the study of fiscal policy, but it also takes the role of ideas seriously. By analysing the electoral and ideational foundations of social democratic austerity, it attempts to explain partisan choices for macroeconomic policies, and focuses on public opinion and its interaction with ideas and the dominant political discourse. This model will be developed to explain the response of social democratic parties to the recession, but theoretically, it should apply equally to other party families.

The response of social democratic parties to the Great Recession The third chapter analyses how social democratic parties changed their electoral strategies in the context of the crisis. It tests whether parties are strategic actors that change their programmes in response to economic crises, i.e. whether we can expect crises to influence party positions in the first place. The results suggest that this is the case, given that social democrats moved to the left in response to the crisis. However, this leftward shift did not extend to all economic issues. On the one hand, social democratic parties defended the welfare state and opposed economic liberalism after the 2007–8 financial crisis, which partly reverted their own Third Way. On the other hand, many parties also supported the reduction of government deficits and taxes during the crisis; i.e. they joined the chorus of austerity that became the dominant tune during the euro crisis. This confirms that the positions of social democratic parties on fiscal policies did not align with their positions on other socioeconomic policies in the shadow of the economic crisis. The remaining part of the book explains this incoherent platform by focusing on the puzzling support for austerity among the centre-left. It focuses less on the variation among social democratic parties in the extent to which they accepted austerity, and more on explaining the broad acceptance of austerity by the centre-left across Europe.

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The popular politics of austerity: studying the demand side of politics For this purpose, the fourth chapter studies the popular politics of austerity, i.e. the demand side. It uses existing data from Eurobarometer surveys that ask respondents about their attitudes towards fiscal policy. In particular, the chapter shows that a large number of voters felt uneasy about their country’s government debt and seeks to understand why this was the case. At the beginning of the crisis, on average, 72 per cent of respondents in the EU agreed that ‘measures to reduce the public deficit and debt [could not] be delayed’ in their country. Even in 2015, a majority of individuals still agreed with this statement, indicating that support for fiscal consolidation remained high throughout the crisis. Chapter 4 analyses this staggering support for fiscal consolidation and systematically investigates the public’s ‘debt aversion’ across a large number of countries. It uses regression analysis to examine the country- and individual-level determinants of preferences with regard to fiscal policy. The results show that less-well-off people are generally less concerned about government debt, generating a positive relationship between income (or wealth) and debt aversion. On the aggregate level, voters respond to changes in the economy in an anti-Keynesian fashion: they are more likely to support fiscal consolidation during the bust than during the boom. Moreover, people’s individual experiences of the economy also mediate the influence of macroeconomic conditions on their support for fiscal consolidation. The fifth chapter digs deeper in order to understand the preferences for fiscal policies better. It uses data from two survey experiments conducted in Germany, Italy, Spain, and the UK to re-evaluate how strong the electoral pressure to support austerity really is. First, it uses a split-survey experiment to analyse to what extent and whether individuals support fiscal consolidation when this comes at the cost of lower government spending and/or higher taxes. Second, the chapter uses a novel conjoint survey experiment to evaluate the support for different fiscal policy packages. Following existing approaches that use conjoint analysis (Hainmueller et al., 2014), respondents had to evaluate different combinations of fiscal policies, including fiscal consolidation. In other words, in a pairwise comparison, participants chose between two simplified fiscal policy packages and indicated the degree to which they support each of the proposals. Through randomization, this analysis allows me to identify the causal effect that consolidation has on the support for a given

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Introduction

fiscal package. The results from both experiments show that fiscal consolidation is less popular than commonly assumed. Although most citizens support fiscal consolidation in principle, it is not a priority for them; rather, they are more concerned about levels of government spending and taxation. This suggests that the centre-left had some scope to interpret and influence public opinion, despite the consensus for fiscal consolidation that Chapter 4 identified. The case studies will take up this finding, analysing the extent to which social democratic parties perceived this as a possibility.

The elite politics of austerity: studying the supply side of politics In Chapters 6 and 7, I analyse the elite politics of austerity, i.e. the supply side of politics. Both chapters primarily use ‘explaining-outcome process tracing’, as outlined by Beach and Pedersen (2013), to study the fiscal policies of the German SPD and the British Labour Party in response to the Great Recession. While Chapter 6 explores the electoral and ideational pressures for austerity within the British Labour Party, Chapter 7 analyses the same pressures within the German SPD. They situate the fiscal policies of each party in a historic context and use quantitative content analysis to fully explore these parties’ programmatic responses to the economic crisis (based on the data used in Chapter 3). Each chapter then draws on over twenty elite interviews to draw out the causal mechanisms that contributed to social democratic austerity. Both chapters argue that social democratic politicians are not neoliberal or ordoliberal ideologues that have accepted the dominance of the market. Instead, both parties are portrayed as strategic actors that were confronted with a common problem: the need to establish economic competence and credibility in the eyes of voters. Faced with a great deal of distrust among voters with regard to higher deficits and convinced that the path to power leads through the centre, they tried to appeal to fiscally conservative voters. They did not believe that they could change public opinion, accepting evidence from conventional surveys as well as focus group research. Internally, however, these positions were also legitimized by economic ideas that social democratic parties had adopted before the Great Recession and that were part and parcel of their Third Way. This ideological framework, based on New Keynesianism, supply-side economics, and the social investment paradigm, is distinct from neo- or ordoliberalism, but it contributed to social democratic austerity and helped to mainstream austerity in Europe.

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The electoral consequences of social democratic austerity The last empirical chapter examines the electoral consequences of social democratic austerity. Some research suggests that mainstream parties benefit from moderation because it allows them to capture ‘potential’ voters from the centre. However, austerity is often opposed to the brand of social democratic parties, threatening to undermine the partisan attachment of their ‘core’ voters. This chapter tests which effect dominates by analysing the electoral effects of social democratic austerity during the Great Recession. It uses TSCS analysis to examine the relationship between austerity events and the popularity of centre-left parties in twelve European countries from 2008 to 2017. The results show that social democrats lose support when they implement austerity and that this effect persists over time. The chapter then uses individual-level panel analysis based on the British Election Study (BES) to examine how voters respond when social democrats adopt orthodox policies in election campaigns. It shows that potential voters who are fiscally conservative are unlikely to support Labour. In fact, orthodox fiscal policies undermine the party’s ability to mobilize its core voters, who are opposed to austerity. This phenomenon has contributed to the electoral crisis of social democratic parties in Europe. Chapter 9 then summarizes the main argument and the empirical findings of the previous chapters. It brings together the key insights gathered from studying the popular and elite politics of austerity and further discusses the political and economic consequences of social democratic austerity. Finally, the book concludes by re-evaluating the fate of social democracy in Europe in the twenty-first century in the wake of the COVID-19 pandemic. Following the Great Recession, social democracy experienced a profound electoral crisis across Europe, and the Conclusion explores whether and how social democratic parties can escape from this crisis. It argues that the economic crisis caused by COVID-19 provides both opportunities and risks for the centreleft: it has contributed to a favourable shift in economic discourse, but it has also massively increased government debt. As the pressure on governments to return to austerity could increase again, social democratic parties need to escape from the electoral and ideational traps identified in this book. They need to rediscover the state as a strong actor that corrects market outcomes and protects the weakest members of society from the unwanted excesses of capitalism. To this end, social democratic parties need to develop bold new ideas that respond to some of the biggest economic and political challenges of our time, redefining their raison d’être. Only this will allow them to regain their place at the heart of European politics.

2 Social Democratic Austerity A Theoretical Framework

Introduction This chapter sets out the theoretical framework of the book. This framework is based on the premise that austerity was a political choice and that individual actors, including parties, play decisive roles in the macroeconomic governance of advanced economies. Although capitalism is a system, there are actors within that system whose choices matter. During economic crises, a focus on agents and their choices is particularly important because these events are often ‘critical junctures’ (Capoccia and Kelemen, 2007; Collier and Collier, 1991) that open up the political space. During economic crises, ‘patterns unravel, economic models come into conflict, and policy prescriptions diverge’ (Gourevitch, 1986, p. 17). They shake the foundations of the political system and lead to a significant amount of uncertainty, allowing policy entrepreneurs to engineer change. Therefore, in the past, economic shocks have led to major political upheavals, including swings in partisan politics, institutional innovation, and changes in the dominant economic paradigm. I thus assume that social democratic austerity was not inevitable. To make this case, I integrate two theoretical perspectives to explain the economic policies that social democratic parties adopted in response to the Great Recession. I combine an approach based on ‘the political sociology of political economy’ (Gourevitch, 1986) with one that takes the role of ideas seriously (e.g. Blyth, 2002; Hall, 1989). In doing so, I argue that neither electoral interests nor economic ideas on their own are deterministic. Rather, it is necessary to consider both the electoral and the ideational foundations of social democratic austerity. Following Beramendi et al. (2015), I assume that parties strategically respond to voters’ (perceived) preferences. They use economic policies to build electoral coalitions and address the concerns of particular constituencies. However, parties are not just conveyor belts for electoral interests. They are also rooted in distinct ideological traditions,

Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0002

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which create internal cognitive pressures within them. These pressures shape how policymakers interpret their political interests and the economy around them. To develop this framework, the chapter considers the policies that social democratic parties pursued before the Great Recession. Then it reviews the existing explanations for social democratic austerity and their shortcomings. Many of these explanations may contain some truths, but none can fully explain social democratic austerity. Consequently, I set out my theoretical framework, focusing on both the electoral and the ideational pressures that social democrats faced in the wake of the 2007–8 financial crisis. I contend that social democratic parties were confronted with a dilemma: although austerity was largely unpopular among social democrats, they endorsed fiscal consolidation in their quest for economic credibility. As the Great Recession was recast as a ‘crisis of debt’ (rather than a ‘crisis of growth’), they resorted to old economic ideas with the hope that this would help their claim to be competent managers of the economy. Social democratic austerity was, therefore, essentially a defensive move. Since the centre-left found itself boxed in by old electoral and ideological approaches to fiscal policy, it was unable to lead the charge against austerity. Over time, this hurt the centreleft because it alienated some voters on the left and failed to persuade many of the fiscally conservative voters that social democratic parties were moving towards.

Social democratic parties and macroeconomic policies before and during the Great Recession The existing literature is inconclusive on the importance of political parties to economic policymaking. Still, according to a significant amount of research from the twentieth century, different parties implement divergent economic and social policies. Focusing on macroeconomic policy, Hibbs (1977, p. 1467) argued that ‘governments pursue macroeconomic policies broadly in accordance with the objective economic interests and subjective preferences for their class-defined core political constituencies’. Accepting the trade-off between unemployment and inflation that existed according to the Phillips curve, he showed that the centre-left adopts policies that reduce unemployment and increase inflation, whereas the centre-right adopts those with the opposite effect. Social democratic parties have thus implemented Keynesian policies of demand management more often than other parties have done (also see Alesina and Rosenthal, 1995; Boix, 2000; Tufte, 1978).

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Although there has never been a single social democratic model (Bartolini, 2000; Keman, 2017), the marriage between social democracy and Keynesianism goes back to the Great Depression.1 European social democratic parties had been born of the labour movement, a few decades before the historic economic shock of the Depression. Closely allied with trade unions, political parties emerged to fight for the interests of the working class. In the wake of the Bolshevik revolution in Russia at the beginning of the twentieth century, however, the labour movement split (Lindemann, 1983): revolutionary socialists who wanted to emulate the revolution in Russia opposed moderate socialists who sought to reform capitalism.2 In most countries, the latter group became known as social democratic or labour parties and began participating in the democratic process. In 1929, when the Great Depression struck, some of these parties were even in government; in this context, many social democrats advocated and implemented deflationary policies, with disastrous consequences (Berman, 1998; Temin, 1989). In the UK, Labour Prime Minister Ramsay MacDonald opted for austerity against the wishes of a significant segment of the Labour Party (Skidelsky, 1970). His decision to form a National Government split the Labour movement, leaving deep scars for decades to come. Similarly, in Germany, the SPD supported Heinrich Brüning’s government, which implemented harsh spending cuts that worsened the deflationary spiral.3 Only in Scandinavia did social democrats implement a bold economic programme in response to the Great Depression; this involved a social compromise between labour and capital and a shared commitment to full employment (Berman, 1998; Paterson and Thomas, 1986). After the Second World War, the thinking of John Maynard Keynes (1936) gave social democratic parties an ideological roadmap with which to abandon austerity. Keynes believed that the economy did not follow natural laws and argued that market orthodoxy paid insufficient attention to the problem of demand. According to his key insight, private investment was volatile, following pro-cyclical tendencies and leading to booms and busts. Assuming that demand fluctuates while supply is stable, he argued that output gaps could emerge, leading to an under-utilization of economic resources. To address 1 Keynesianism here is defined as a macroeconomic theory which explains and influences the business cycle. It proposes to use a variety of monetary and fiscal policies to smooth the amplitude of that cycle. Keynesians suggest that, during economic crises, governments should use loose monetary policies and a combination of deficit spending and tax cuts to stimulate the economy. 2 The ideological fathers of social democracy, including Eduard Bernstein, emphasized the primacy of politics, which allowed them to reject Marxist historical materialism. They believed that political action could significantly improve the condition of the working class. 3 Although largely forgotten in contemporary Germany, these cuts contributed to the rise of Hitler, paving the way for the Second World War (Galofré-Vilà et al., 2021).

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this, Keynes believed that governments should manage demand to ensure full employment. Macroeconomic policies were not just supposed to stabilize demand when private investment was low; they were also intended to influence the ‘animal spirits’, facilitating positive economic expectations that would encourage private investment. This provided the intellectual foundation for state intervention in the economy and supplied social democratic parties with their new dominant modus operandi: it allowed them to abandon the goal of nationalizing the means of production, which was electorally infeasible (Przeworski, 1985), while pursuing distinctive macroeconomic policies that were in line with the economic interests and preferences of ‘their class-defined core political constituencies’ (Hibbs, 1977, p. 1467). Therefore, Keynesianism supplied the basis for a European class compromise between capital and labour (Fourcade, 2009; Hall, 1989; Offe, 1983, 1985) and became closely associated with social democracy in most European countries (Hall, 1989; Przeworski, 1985).⁴ This avoided the levels of unemployment that Western Europe had previously experienced and allowed social democratic parties to make peace with capitalism. They established themselves as a mainstream political force across Europe, while communist movements were pushed to the fringes of the party system in most Western European countries.⁵ And as governments successfully used the tools of the state to generate growth, Keynesianism even became the dominant economic paradigm in advanced economies during the post-war era (Shonfield, 1965). In the context of this Keynesian settlement, the centre-left was able to use the resources of the working-class movement to build a generous welfare state and to introduce corporate wage bargaining across most of Europe (e.g. Cameron, 1984; Esping-Andersen, 1990; Korpi, 1983; Stephens, 1979).⁶ This golden age of social democracy, or les trente glorieuses, came to an end in the midst of the economic chaos of the 1970s. Repeated economic crisis and the occurrence of stagflation challenged the Keynesian settlement. In the absence of broad-based economic growth that could sustain higher rates of profit for capital as well as higher living standards for labour, the grand compromise was undermined. The economic disruptions of that decade, including the collapse of the Bretton Woods system and the oil shocks, led ⁴ In some countries, social democratic parties did not explicitly use Keynesian demand management. For example, in Sweden, social democrats espoused the Rehn–Meidner model, which included restrictive fiscal policies (Pontusson, 1992). However, the Rehn–Meidner model also solved the problem of demand that Keynes had identified by creating the preconditions for full employment and reducing wage inequality. ⁵ The exception was the Communist Party in Finland, which participated in several governments during the Cold War period. ⁶ The welfare state has also fulfilled a ‘Keynesian’ function in many European economies. By providing automatic stabilizers like unemployment benefits, it has lowered economic volatility and reduced the need for discretionary monetary and fiscal policies.

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to Keynesianism’s gradual demise. Over time, even social democratic parties abandoned Keynesian demand management as their preferred economic strategy. The most common factor levied to explain this development was globalization and the growing economic interdependence of countries: increasing capital mobility and free-floating exchange rates changed the basic parameters of economic policy management and undermined the ability of governments to use Keynesian macroeconomic policies (Boix, 2000; Garrett and Lange, 1991; Scharpf, 1991). In particular, the failure of Keynesianism to fight stagflation handed victory to neoliberalism, which became the dominant doctrine after the elections of Margaret Thatcher and Ronald Reagan (e.g. Blyth, 2002; Hall, 1993).⁷ Subsequently, right-wing governments liberalized Western Europe’s economies, while most social democratic parties were stuck in opposition. Even where social democrats were still in government, their leaders also felt compelled to change their economic policies. For example, François Mitterrand, the first socialist President of France, made a dramatic U-turn in economic policy in 1982 when he adopted ‘austerity with a human face’ (Hobsbawm, 1994, p. 411). Similarly, the social democrats in Sweden implemented austerity policies to fight the recession in 1989 and 1990 before losing the election in 1991 (Pontusson, 1995). The 1980s thus ended the symbiosis between Keynesianism and social democratic parties (Scharpf, 1991). The failure of traditional leftist policies led to much soul-searching among social democratic parties. Facilitated by the collapse of the Soviet Union and the end of the Cold War, they moderated their economic positions and shifted towards the centre. They stepped away from their Keynesian economic policies and adopted deflationary ones. Arguing that globalization and technological changes put pressure on the social democratic model, the centre-left adopted pro-market positions and distanced itself from trade unions (Moschonas, 2002, p. 253). It supported deregulation, privatization, and a less activist fiscal policy (Cusack, 1999). Social democrats still pursued distinctive supply-side policies to further their traditional goals (Boix, 2000; Garrett and Lange, 1991), but they accepted that the basic parameters of economic policymaking had changed.

⁷ The word ‘neoliberalism’ is often used as a catch-all term, primarily by its opponents. I use the word more narrowly by following Harvey (2005, p. 2), who defined neoliberalism as a ‘theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade’.

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The turn towards the centre was most pronounced in the UK and Germany under Tony Blair and Gerhard Schröder, respectively. From the mid-1990s onwards, both adopted the so-called Third Way, which abandoned traditional positions of the left and espoused liberal reforms to deregulate the economy. This concept of the Third Way was often poorly defined and primarily served as a rhetorical device. Moreover, a range of social democratic models continued to be adopted in other countries in the early 2000s. Still, this philosophy generally contributed to a convergence of mainstream parties on the economy. Party politics mattered less for socio-economic policymaking than it had before (e.g. Callaghan, 2000; Glyn, 2001; Lavelle, 2008; Mishra, 1999; Pierson, 2001a; Ross, 2000). The official argument for the social democratic accommodation with economic liberalism referred to structural factors: accepting the deterministic character of globalization, Blair and Schröder argued that supply-side reforms were necessary (Blair and Schröder, 1999; Giddens, 1998). However, the logic of electoral competition also pushed the left towards the centre in the 1990s because its traditional constituency, the working class, was shrinking. In fact, the working class had never formed a numerical majority in any of the advanced capitalist economies, and centre-left parties had always had to build coalitions with other groups in society to win elections (Esping-Andersen, 1985; Przeworski and Sprague, 1986). Over time, this ‘dilemma of electoral socialism’ (Przeworski and Sprague, 1986, p. 55) only became more acute, as structural changes reduced the size of the working class due to the transition from the industrial to the knowledge society. The moderate left increasingly competed for the support of the middle classes (Gingrich and Häusermann, 2015; Kitschelt, 1994). It adopted liberal positions on the ‘cultural’ dimension of political competition (largely in response to the rise of the New Left, which had raised the salience of ‘cultural’ issues like gay rights, gender equality, and immigration). At the same time, it struck a ‘Faustian bargain’ with economic liberalism by embarking on the Third Way. Although social democratic parties never fully endorsed the neoliberal doctrine, as I argue later, this provided a political cover for the doctrine. And the Faustian bargain was arguably a success for the left in the late 1990s and early 2000s, when the stability of the Great Moderation allowed governments to pursue policies that were favourable to capital owners while protecting the most vulnerable in society through the welfare state.⁸ Volatility ⁸ The Great Moderation refers to a period of remarkable economic stability in most advanced economies, which lasted from the mid-1980s to 2007. At that time, this reduction in the volatility of business cycles across the advanced economies was thought to be permanent, but the financial crisis shattered this illusion.

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in the business cycles of advanced economies had become extremely low, as independent central banks used monetary policy to steer their economies.⁹ For most (social democratic) governments in Europe, this was a favourable environment. The relative economic prosperity guaranteed high tax revenues and easy access to financial markets, allowing them to finance high levels of government spending. They were effectively able to have their cake and eat it, too: introducing liberal economic reforms, they nonetheless increased public spending in areas like health and education. Helped by the reluctance of the European Union (EU) to enforce the Excessive Deficit Procedure of the Stability and Growth Pact (SGP), government expenditure rose in many Western European countries in the early 2000s.1⁰ In this context, social democratic parties experienced their second electoral spring (as seen in Figure 1.1 from Chapter 1). At one point in the early 2000s, centre-left parties were in government in eleven out of the EU’s fifteen countries. Still, the turn towards the centre alienated some of the traditional constituency of social democratic parties: many blue-collar and lower-whitecollar employees became disillusioned with these parties (Arndt, 2013; Horn, 2021; Karreth et al., 2013; Schwander and Manow, 2017). In particular, the dualization of the workforce created a large group of outsiders (Rueda, 2005, 2007), who were unemployed or could only find employment in the increasing low-wage sector with little job security. At the same time, the alliance between labour unions and social democratic parties began to crumble (Piazza, 2001), and parties on the far left gained popularity again. For example, in Germany, disgruntled politicians and voters abandoned the SPD, boosting support for the successor of the East German communist party and facilitating the rise of a nationwide ‘social populist party’ (March, 2011). The bargain that the centre-left had struck with neoliberalism at the beginning of the twenty-first century, therefore, left it exposed when the 2007–8 financial crisis hit. At the beginning of the crisis, social democratic parties were still in government in some of the largest European economies, including Germany, Spain, and the UK. Like most economists, commentators, and political parties, they initially called for decisive action to dampen the effects of the economic shock. Led by British Prime Minister Gordon Brown, governments acted together to avoid another Great Depression (Drezner, 2014): governments across the world bailed out banks and resorted to emergency Keynesianism ⁹ Gordon Brown (1999b) famously even declared that under the New Labour government, Britain would ‘never return to the days of Tory boom [and] bust’. 1⁰ The EU even relaxed the SGP in 2005, after Germany and France had been the first countries to breach the Maastricht criteria due to excessive deficits.

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to fight the deflationary pressures in the global economy (e.g. Hall, 2013; Pontusson and Raess, 2012). Yet, when the financial crisis turned into a sovereign debt crisis in 2010, even social democratic parties accepted austerity as the only game in town, as outlined in Chapter 1. There was some variation in the extent to which social democratic parties bought into the austerity settlement, but most of them accepted the need to reduce public deficits and debt across Europe in 2010. In some countries, social democratic parties were primarily responsible for implementing austerity when they were in government at the beginning of the European sovereign debt crisis (e.g. Spain, Greece, Portugal). In others, they laid the discursive foundation for austerity by agreeing to fiscal rules (e.g. Germany) or emphasizing the importance of deficit reduction (e.g. the UK). In yet other countries, social democratic parties agreed to join or support governments that would eventually pursue fiscal consolidation as well (e.g. Ireland, Italy, the Netherlands, Austria). Thus, social democratic parties not only supported austerity when they were in government in debtor countries, with their hands tied by financial markets, but also when they were in opposition. This happened even in creditor countries, where borrowing costs were very low. Government bonds in these countries were often seen as safe investments, and especially in the context of the low interest rate environment, there was no obvious need to turn to fiscal consolidation. This is especially true because the turn to austerity happened in an economic environment in which the crisis was far from over. Although some European countries returned to meagre growth after the immediate storm of the financial crisis, the recovery was slow, and output remained below its pre-crisis level in most European economies for some time. Admittedly, it is easy to criticize austerity in hindsight, but even in 2010, the left’s case for an alternative to the policy should have been obvious. On the one hand, austerity shifted the burden of the crisis response onto the weakest members of society, whom social democrats seek to represent. It caused unemployment, undermined the welfare state, and was a brake on growth—especially in those countries that were already among the poorer regions in Europe before the crisis. Politically, these distributive effects should have been reason enough for social democrats to rally against austerity. It was antithetical to some of their most important aims, including full employment and low inequality. On the other hand, from a Keynesian perspective, austerity did not make sense in economic terms either. Even in countries where employment rebounded quickly, productivity and wage growth were anaemic, contributing to a low-growth environment. The year 2010 was far too early for most

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countries to engage in fiscal consolidation. Subsequently, all the pressure was on monetary policy to support demand in Europe, and it was only thanks to massive interventions by central banks that aggregate demand did not fall even further in Europe. While governments slashed government spending and agreed to new fiscal rules, central banks adopted ultra-low or even negative interest rates and expanded their balance sheets. This loose monetary policy was a gift to those who championed austerity (on the right) because it offset some of austerity’s negative consequences, thereby weakening the trade-offs associated with it. Expansionary monetary policies, however, had distributional consequences that the left should have been concerned about: they boosted house prices and contributed to an inflation of asset prices more generally, which disproportionally benefits households at the top end of wealth distribution. The combination of expansionary monetary and fiscal policies was thus a double whammy for inequality, which increased even in countries that were spared the worst excesses of austerity. At the same time, the persistence of low economic and productivity growth would have been a good reason to pursue more expansionary fiscal policies instead. Especially in countries where borrowing remained cheap and became even more so due to low interest rates, higher spending could have been used to increase public investment. Extensive borrowing to finance crumbling infrastructure, expand green energy, or increase human capital could have been used to sustain aggregate demand while improving the longterm prospects for growth. Arguably, the crisis not only signalled the need for a short-term countercyclical fiscal policy but should also have been a golden opportunity for social democrats to argue for a sustained expansionary fiscal policy in the long term.

Existing explanations for social democratic austerity For those seeking to understand why social democratic parties still participated in the rollercoaster ride from emergency Keynesianism to austerity, the existing literature provides several starting points. These approaches focus on a range of different variables, including external constraints (stemming from globalized markets), institutional constraints (stemming from the EU and different growth models), and economic ideas. However, none of the existing approaches suffice to explain why social democratic parties adopted strategies that embraced an element of austerity in response to the Great Recession. First, some authors question the explanatory power of political parties for economic policymaking; instead, they focus on external constraints and the

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structural imperatives of the global economy. According to Katz and Mair (1995, 2009), parties have formed a political ‘cartel’, which is detached from voters. Their positions have converged because parties with an aspiration to govern are increasingly more ‘responsible’ with respect to external constraints and less ‘responsive’ to their constituencies, which also leads to a ‘hollowing out of democracy’ (Mair, 2013).11 Some authors, for instance, contend that the collapse of the Bretton Woods system and the end of the post-war economic boom which accompanied the subsequent 1973 oil crisis effectively killed off social democracy by ruling out traditional Keynesian policy tools (Bailey, 2009, p. 606; Lavelle, 2008; Panitch and Leys, 2001, p. 107; Rogers, 2013, pp. 8–9; Scharpf, 1991). Others point to the rise of globalized capital markets in the 1980s—which were seen to empower footloose capital and to punish inflationary economic policies—to explain the ‘death’ of social democracy (Streeck, 2014; Streeck and Schäfer, 2013). The pessimistic conclusions of these authors, however, rest on the assumption that international (financial) markets are what Thomas Friedman (1999) has called a ‘golden straitjacket’. According to this view, the increasing mobility of capital made it more difficult for the state to regulate markets, while international competition undermined the welfare state. This reduced the opportunities for centre-left parties to implement their traditional policy programmes. Yet, many studies have shown that globalization constrains states less than is often assumed. National states are anything but irrelevant (Hirst and Thompson, 1996; Ruggie, 1993), and substantial differences in economic policies remain across countries (Huber and Powell, 1994). Domestic institutions have an important effect on macroeconomic policy Garrett (1998a,b), and it is important to remember that ‘states are in fact agents of globalisation’ (Barkawi, 2006, p. 168). In other words, states actively shape the globalization process, which is contingent on the state system (Gilpin, 2001; Krasner, 1999). Policymakers often use globalization as an excuse for their actions, but its supposedly deterministic impact needs to be questioned (Hay and Smith, 2010). This is also true with regard to contemporary austerity in Europe. First, market pressures are not a sufficient explanation for social democratic austerity. It was not only in countries that were embroiled in deep financial and economic crises that the centre-left embraced austerity; indeed, the move to fiscal orthodoxy was much broader, encompassing countries and governments across the entire European continent. Even if social democrats 11 The cartel party thesis takes the argument from the dealignment thesis further. Dalton et al. (1984) had previously claimed that the durable linkages between voters and parties broke up during the twentieth century and that issue-specific competition had replaced partisan competition.

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in countries like Greece, Portugal, and Spain had little choice but to adopt ‘involuntary’ austerity, other social democratic parties chose to adopt what can be called ‘voluntary austerity’. For example, social democratic parties in countries like the UK, the Netherlands, and Germany also supported fiscal consolidation, even though the pressures for austerity from markets were relatively weak or absent (see Chapter 3). As argued earlier, many of these countries were perceived as safe havens during the crisis and, as a result, interest rates on government bonds plummeted. Governments were able to borrow cheaply, making austerity less, not more likely. Other social democratic parties in crisis countries, in turn, even went so far as to adopt austerity as their policy of choice when they were in opposition and did not have any government responsibility. Second, it is not even clear whether, and if so why, markets demand austerity in the first place. In the immediate aftermath of the financial crisis, governments across the advanced economies successfully used expansionary macroeconomic policies, thereby preventing a crisis on the scale of the Great Depression (Eichengreen, 2015b). These policies were supported by market actors, which demonstrates that globalization had not made Keynesianism an implausible economic strategy.12 Moreover, in 2010, when the financial crisis became a fiscal crisis, market actors came to perceive the fiscal position of some European governments as fragile because the role of the European Central Bank (ECB) as lender of last resort was not guaranteed (De Grauwe, 2013a; De Grauwe and Ji, 2013). They did not demand austerity per se; instead, they demanded a credible backstop that would safeguard their assets and investments in crisis-ridden countries.13 After Mario Draghi had promised to do ‘whatever it takes’ to save the euro, the financial pressure on Europe’s periphery receded. Still, austerity continued, which suggests that the austerity settlement was more a political choice than an economic necessity. A second explanation for social democratic austerity focuses on institutional constraints. These arguments are closely related to the previous explanation, but they go beyond the imperatives of globalized markets. Generally, they take two forms. Some authors point to the institutional bias in European integration, which has reduced the number of policy instruments available to member states (Scharpf, 2011) and favoured fiscal consolidation (e.g. Hallerberg et al., 2007; Schmidt and Thatcher, 2013). Building on 12 In many countries, market actors even explicitly called on the government to adopt emergency Keynesianism. For some examples, see the case studies on the British Labour Party and the Germany SPD in Chapters 6 and 7, respectively. 13 Rommerskirchen (2015, p. 845) reviews the literature and finds that ‘the alleged preference of financial market participants for stricter fiscal rules is based on a handful of articles whose generalisability and validity can be questioned’.

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a large empirical and theoretical literature (e.g. Debrun et al., 2008; von Hagen, 1992; von Hagen and Harden, 1996; von Hagen and Poterba, 1999), this approach suggests that ‘the institutions governing the budget process are important determinants of a country’s fiscal performance’ (Hallerberg et al., 2007, p. 340). In the EU, these institutions were centralized in the early 1990s when member states signed the Stability and Growth Pact (Heipertz and Verdun, 2010). The pact enshrined rules for national deficit and debt levels and specified sanctioning procedures, thereby reducing the ability of governments to pursue expansionary fiscal policies in bad times when GDP shrank and the government’s revenues fell. Moreover, monetary integration in the eurozone limits governments’ ability to use deficit spending during economic crises. The ECB is beyond the control of national governments, who issue bonds in a currency that they do not control. In the absence of an explicit guarantee that the ECB would act as a lender of last resort, governments in the monetary union had to limit their budget deficits to prevent self-fulfilling fears of liquidity crises. Other authors have argued that different countries have different ‘varieties of capitalism’ (VoC) (Hall and Soskice, 2001) or ‘growth models’ (Baccaro and Pontusson, 2016; Baccaro et al., 2022), which limits the macroeconomic policies that countries can pursue. Initially, the VoC literature paid little attention to macroeconomic policies, but Soskice (2007) argued that liberal market economies (LMEs) manage aggregate demand more flexibly than coordinated market economies (CMEs) due to powerful complementarities in different economic systems (also see Carlin and Soskice, 2009). For example, CMEs rely less on discretionary macroeconomic policies than LMEs because stronger welfare states and employment protection (as well as other institutional characteristics) act as automatic stabilizers. Instead, rule-based macroeconomic policies facilitate wage bargaining between social partners in CMEs, signalling to trade unions that demands for excessive wage hikes would not be accommodated. Similarly, the growth-model perspective assumes that there are strong imperatives for distinct economic policies in different countries. According to Baccaro and Pontusson (2016), several distinct growth models developed in the post-Fordist era, in which different components of aggregate demand are the drivers of growth. Following the imperatives of these growth models, there is little room for partisan politics when there is a clear driver of growth: when growth is consumption-led (e.g. in the UK) governments stimulate domestic consumption, whereas they pursue restrictive macroeconomic policies to boost their competitiveness when growth is export-led (e.g. in Germany).

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However, these approaches are not sufficient to explain the austerity settlement of Europe’s post-crisis political economy either. Austerity was entangled with the eurozone crisis, but it also became the dominant policy in countries where the constraints from European integration were relatively weak or absent. Even if the bailout agreements forced austerity onto countries in southern Europe and Ireland, the same cannot be said of countries like the UK, France, and Germany. For example, the UK has its own currency and central bank and was never subject to the rules of the eurozone. Still, the British Labour Party embraced fiscal orthodoxy in the wake of the economic crisis (see Chapter 6). Although the British government committed itself to a fiscal austerity programme similar to that of some debtor countries in 2010, the Labour Party did not openly describe itself as anti-austerity until the election of Jeremy Corbyn as its leader in 2015. Moreover, even in large creditor countries inside the eurozone, which should be less susceptible to pressures from Brussels, social democratic parties accepted austerity, including the SPD in Germany (see Chapter 7) and the Parti Socialiste (PS) in France. These countries had already broken the Maastricht criteria in the mid-2000s without any consequences, and it remains unclear why constraints from European integration should have been more binding during the Great Recession, when expansionary fiscal policies could easily have been justified by Europe’s low-growth environment, than prior to it. The context of the eurozone crisis still mattered, as austerity was a European-wide response to the crisis. Yet, in creditor countries, austerity was also a distinctively national response to it, influencing fiscal policies outside of the ‘crisis’ countries as well.1⁴ Similarly, austerity was implemented in countries with different growth models and varieties of capitalism, ranging from consumption-oriented to export-oriented countries and from LMEs to CMEs. The growth model literature is useful because it explicitly calls for the study of macroeconomic policy (Baccaro et al., 2022). However, growth models cannot be deterministically used to read off specific macroeconomic policies for individual countries. During normal times, countries may be more likely to pursue macroeconomic policies in line with their growth models. They adopt ‘growth strategies’ (Hassel and Palier, 2021), including macroeconomic, labour-market, social, and industrial policies, that underpin specific growth models. Powerful social coalitions that cut across the labour–capital divide, and which comprise the segments of society which are the de facto winners of a given growth model, may strongly push for certain policies 1⁴ This book, therefore, mainly focuses on the national responses of social democratic parties to the Great Recession; however, it will discuss the European dimension in the German case study (Chapter 7).

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over others, leaving little room for political contestation. During economic crises, however, these policies can nonetheless become controversial. In such moments, the politics of growth models moves from the realm of quiet politics into that of loud and noisy politics, which can shake up the equilibrium of well-established coalitions and undermine the sustainability of pre-existing growth strategies and even of growth models themselves. As Baccaro et al. (2022, p. 30) argue, the Great Recession was such an instance of ‘messy politics’. In this context, it would be wrong to speak of austerity as the choice of a cross-class coalition. In fact, in many of these countries, social partners did not rally behind austerity as the dominant economic policy. Instead, trade unions were often more strongly opposed to austerity policies than social democratic parties were (e.g. in the UK, see Chapter 6), and in some instances, even businesses protested against fiscal consolidation as the dogma of the day due to its negative impact on investment (e.g. in Germany, see Chapter 7). However, social democrats embraced austerity across these countries, a broad acceptance that cannot be explained by the institutional imperatives derived from different varieties of capitalism or growth models. Alternatively, many scholars have turned towards the importance of ideas in explaining the dominance of austerity in the context of the Great Recession. These approaches emphasize that the beliefs held by actors about their environment are integral to the process of how these actors make sense of the world around them, and this is especially true during crises (Hay, 2016, p. 525). These create windows of opportunity during which ideas can trump vested interests and existing institutions and act as the ‘switchmen of history’, according to Max Weber (1946, p. 280). In other words, crises create the perfect preconditions for paradigm change, as outlined by Hall (1993). During these favourable moments, ideas serve as explanations of ‘what [has gone] wrong, and how to fix it’ (Blyth, 2002, p. 32) and, hence, they decisively shape the response to any crisis (Berman, 1998; Hall, 1993; Matthijs, 2011; Widmaier et al., 2007). Therefore, it is well established that a range of economic ideas contributed to austerity in Europe (e.g. Baker, 2015; Ban, 2016; Blyth, 2013; Blyth and Matthijs, 2017; Carstensen and Matthijs, 2018; Dellepiane-Avellaneda, 2015). Austerity is underpinned by a range of normative and economic ideas about the appropriate role of the state vis-à-vis markets and households (Blyth, 2013; Gamble, 2013a). The existing literature mostly presents austerity as either the result of neoliberal or ordoliberal ideas or—more realistically—a combination of the two (Blyth, 2013). Those who argue that austerity is rooted in neoliberalism point to the importance of neoliberal economic ideas, including the ideas that government borrowing ‘crowds out’ business and household spending

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(Barro, 1974), and that fiscal consolidations have an ‘expansionary’ effect (see Alesina and Ardagna, 1998; Giavazzi and Pagano, 1990) in shaping contemporary austerity (Carstensen and Matthijs, 2018; Dellepiane-Avellaneda, 2015; Helgadóttir, 2016; Mirowski, 2013; Peters, 2012; Schmidt and Thatcher, 2013). Accounts that uncover the powerful role played by ordoliberal ideas in shaping contemporary austerity focus on notions of ‘sound money’, a rule-based approach to economics, and the ‘moral hazard’ associated with transfers (and discretionary policies more generally) to explain the austerity settlement in Europe’s post-crisis political economy (Matthijs, 2016; Matthijs and McNamara, 2015; Nedergaard and Snaith, 2015; Woodruff, 2016; Young, 2014).1⁵ I do not question that such ideas have fed into the post-crisis politics of austerity, but that the focus on neoliberalism and ordoliberalism has limited our understanding of how various political actors have utilized different ideas to legitimize their programmes since 2010. In particular, social democratic austerity has been under-theorized because social democracy was historically associated neither with neo- nor ordoliberalism. Although social democrats were influenced by the dominance of liberal economic ideas (Hindmoor, 2018; Lynch, 2020; Mudge, 2018), social democracy is rooted in a distinct ideational tradition. It thus remains unclear how austerity was internally legitimized and why it was not challenged by other economic ideas within the centre-left in the shadow of the Great Recession. This is true because, at any point in time, different economic theories exist which could gain traction. Constructivists often implicitly invoke a Gramscian notion of ‘cultural hegemony’ (Gramsci, 1992) to explain the lack of contestation. However, in the twenty-first century, ideas cannot easily be domesticated and kept within national borders and, given that alternative economic models existed outside of Europe in the post-crisis period, it is not clear why austerity remained such a powerful idea in that continent. For example, Japan pursued an alternative economic policy under Prime Minister Abe and in the United States, Keynesian macroeconomic ideas also remained more popular than in Europe. Even the IMF began to question austerity as a doctrine during the crisis and became critical of Europe’s approach to crisis resolution (see Clift, 2018). For example, in 2012, then-IMF Chief Economist Olivier Blanchard (2012) admitted that fiscal consolidation was ‘clearly a drag on demand’ and ‘a drag on growth’. In 2013, Blanchard went 1⁵ Little discussed in the pre-crisis period, ordoliberalism can be defined as a variant of liberalism, which ‘asserts the authority of the state as the political master of the free economy’ (Bonefeld, 2012, p. 641). Contrary to neoliberalism, it argues that ‘full competition requires strong state authority to assure the orderly conduct of self-interested entrepreneurs’ (Bonefeld, 2012, p. 638).

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further and conceded that forecasters had significantly underestimated the multiplier effect and, therefore, ‘underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation’ (Blanchard and Leigh, 2013, p. 5). This begs the question of why Europe’s social democrats were unwilling or unable to use new economic ideas to position themselves as the primary challengers of austerity in post-crisis Europe.

A new explanation for social democratic austerity My explanation of social democratic austerity is based on the premise that we need to take politics seriously. As the English Prime Minister William E. Gladstone is reported to have said, ‘budgets are not merely a matter of arithmetic, but in a thousand ways go to the root of prosperity of individuals and relations of classes, and the strength of kingdoms’. In other words, fiscal policies are not only a matter of economic necessities but are also at the heart of politics themselves. This is especially true in the context of the Great Recession, which was the deepest economic crisis since the Great Depression. It was triggered by a crisis in the sub-prime mortgage market in the United States, but it quickly spread across the globe to become a major economic recession. It was the beginning of an era that presented policymakers with enormous challenges on multiple fronts. They were scrambling to hold the financial system together as some of the largest international banks were pushed towards the brink of bankruptcy, while also trying to prevent a Depression-scale economic crisis. In the face of extreme uncertainty, policymakers expected the worst and, at least in Europe, this feeling persisted well beyond 2008. As the eurozone crisis pushed entire countries to the brink of bankruptcy, Europe remained in a perpetual state of upheaval, and many observers questioned the viability of the common European currency. In the context of such monumental crises, macroeconomic thinking was in a constant state of flux. Public policies became highly salient and, therefore, we need to understand the political conflicts behind austerity at this time, when it became the dominant fiscal policy in Europe.

The electoral foundations of social democratic austerity To take the role of politics in this story seriously, it is necessary to consider the demand-side factors behind austerity. Traditionally, political economy tends to focus on the interests and ideas of elites and largely ignore public opinion.

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However, during economic crises, this approach is not tenable because ‘mass politics trumps interest group politics when both come into play’ (Hooghe and Marks, 2009). Supply-side explanations might explain the nature of politics on non-salient issues, which are in the realm of quiet (Culpepper, 2011) or technocratic politics. However, the demand side becomes important for salient issues, which are in the zone of loud or electoral politics (Busemeyer et al., 2020). In this case, policy choices are made by politicians, who are accountable to the electorate and need to organize majorities for their preferred policies. As Robert Dahl (1989, p. 95) put it, in democratic systems ‘a majority of citizens can induce the government to do what they most want it to do and to avoid doing what they most want it not to do’. Parties, therefore, ‘stay closed attuned to the ebb and flow of public opinion’ (Wlezien and Soroka, 2007, p. 805). As they compete in elections, they respond to public opinion and carefully craft their programmes with reference to electoral considerations (Brooks and Manza, 2007; Erikson et al., 2002; Page and Shapiro, 1983; Soroka and Wlezien, 2010). Especially in the past few decades, as polling techniques have become cheaper and more sophisticated, parties and politicians have increasingly relied on them to get a sense of public opinion. Beramendi et al. (2015) thus called for an ‘electoral turn’ in political economy, which takes voters’ preferences and public opinion seriously. Still, in recent decades, political economists have paid little attention to the role of electoral politics for macroeconomic policies. Even in the influential volume by Beramendi et al. (2015), the politics of these policies are hardly discussed, while electoral considerations are absent in other research on the topic. New work on growth models and growth strategies has moved the focus back to the politics of macroeconomic policies (Baccaro et al., 2022; Hall, 2022; Hassel and Palier, 2021), but more broadly, electoral politics is often still an afterthought when it comes to the study of the macroeconomy. This is striking because political economy research on other policies attributes an important role to electoral considerations.1⁶ Moreover, when it comes to the macroeconomy, fiscal policies in particular should be influenced by electoral considerations because they are difficult to insulate from politics. Not only do fiscal policies have large distributional consequences, but they also receive a great deal of media attention and are politically more contested than other macroeconomic policies. Schumpeter(1991, p. 100), therefore, argued that ‘the budget is the skeleton of the state stripped of all misleading ideologies’. 1⁶ For example, a sizeable amount of research on labour market policies (e.g. Boix, 1998; Rueda, 2007) and the welfare state (e.g. Häusermann, 2010; Pierson, 1996; Rehm, 2016) shows that electoral politics and individual preferences matter for policy choices.

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Especially during economic crises, fiscal policies are highly salient and lie firmly in the realm of popular politics. Therefore, the supply of fiscal policies is not independent of demand: while politicians can shape and influence public opinion, they also serve it. In other words, ‘the freedom of politicians is circumscribed by their need to construct support coalitions’ (Gourevitch, 1986, p. 239). I assume that this is also true for contemporary social democrats; hence, it is necessary to explore the strategic choices that party leaders faced in the context of the Great Recession. In other words, we have to explore the interdependence between political economy and electoral politics, analysing how party leaders cope with voters’ changing demands (Kitschelt, 1999, p. 318). Generally speaking, there are two different models that describe how political parties interact with the electorate (cf. Vlandas, 2018). Some research suggests that parties represent the economic interests of their constituencies. From this perspective, parties are embedded in a broader, social context: they developed out of social divisions and remain linked to organized interests, such as trade unions. They have commitments to specific constituencies that they aim to represent. For example, Hibbs (1977) argued that political parties implement different macroeconomic policies because their respective constituencies have different economic interests: while left-wing parties represent people with insecure jobs and a low level of savings, right-wing parties represent parties with more secure jobs and higher savings. Similarly, Boix (1998, p. 203) emphasized that ‘economic policies respond to the material interests of each party’s main electoral constituencies’. He argued that the possibilities for Keynesian demand management had been tightly constrained by globalization but that political parties still implement different supply-side policies according to the interests of their electorate. Other research suggests that parties compete for the median voter and strategically adjust their positions in response to changes in public opinion. According to the theory articulated by Anthony Downs (1957), the party that is closest to the median voter will win a majority in single-member districts. This creates incentives for parties to compete for the median voter, i.e. to adopt and implement policies that are in line with the preferences of that voter. In electoral systems with proportional representation (PR), the party closest to the median voter will not automatically win a majority, but the socalled median legislative party, i.e. the party closest to the position of the median voter, is expected to be pivotal in the process of government formation. It is usually included in the governing coalition; hence, office-seeking parties still have an interest in competing for the median voter in PR systems.

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In reality, the two models of partisan competition are not exclusive. Political parties respond to the interests of their core constituencies, but—to the extent that they are office-seeking (Strøm, 1990)—they have to create electoral majorities for their preferred policies. The challenge for mainstream parties is to balance the demands of their constituencies with a need to maintain broad appeal, and social democratic parties have always had to confront this challenge. They were born from the reformist aspirations of the working class; i.e. they attempted to win office so as to reform capitalism in workers’ interest (Esping-Andersen, 1985; Przeworski and Sprague, 1986, p. 26). Contrary to the expectations of Marx, and as mentioned earlier, the industrial working class never became a majority in advanced economies. Hobsbawm (1979, p. 279), therefore, wrote in the 1970s that ‘the forward march of labour and the labour movement, which Marx predicted, appears to have come to a halt’. This created the need for social democratic parties to build electoral alliances: ‘with the support of workers alone or of the people in general, electoral majorities turned out to be an elusive goal’ (Przeworski and Sprague, 1986, p. 4). The imperative of cross-class cooperation, which had already been recognized by the ideological founding fathers of social democracy like Eduard Bernstein, had important consequences for the programmatic choices of social democratic parties throughout the twentieth century. As Przeworski and Sprague (1986, p. 3) argued, ‘given the minority status of workers, leaders of class-based parties must choose between a party homogeneous in its class appeal but sentenced to perpetual electoral defeats or a party that struggles for electoral success at the cost of diluting its class orientation’. Office-seeking social democrats followed the latter strategy: they attempted to maximize the interest of their core clientele within a system of competitive elections. To this end, social democratic parties had to manage a variety of constituencies to win elections, cobbling together an alliance between working- and middle-class voters in the post-war era (Kitschelt, 1994, p. 33). In the past few decades, large-scale transformative processes like globalization, deindustrialization, and digitalization made the need for crossclass alliances more pressing. They reduced the size of the working class (Fox Piven, 1991; Pontusson, 1995) and divided its remainder into sections with diverging interests (e.g. Rueda, 2007). Consequently, Esping-Andersen (1985, p. xiv) had claimed in the mid-1980s: ‘the new salaried white-collar strata hold the key to any viable social democratic alliance’, while Kitschelt (1994, p. 6) stated a decade later: ‘social democrats are no longer primarily the political agents of blue-collar workers, but forge socio-economic coalitions that include different segments of the labour market’. These predictions have

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largely been confirmed over time. Over the past few decades, social democratic parties have shifted their electoral platform and have primarily sought support from the expanded middle classes.1⁷ As we have seen, the Third Way directly resulted from this need to manage different electoral constituencies. After the end of the Cold War, many social democrats accepted capitalism as hegemonic and bought into the argument of Francis Fukuyama (1992), who had proclaimed the ‘end of history’. They did not challenge centre-right underlying faith in free markets and assumed that markets could be an instrument to achieve social democratic objectives. Many adopted a technocratic and managerial approach to politics, reaching deep into the electoral centre to win elections. The Great Recession, and austerity in particular, exposed the social democratic dilemma once more, as social democrats struggled to champion the interests of their traditional constituencies while appealing to a broader electoral coalition. Austerity went against the interests of low-income households and, in some countries more than others, directly undermined the welfare state that the left had built in the twentieth century. Austerity thus threatened to dilute the brand of social democratic parties (Lupu, 2016): it was inconsistent with their traditional positions, especially their support for the welfare state, and undermined the attachment of their core supporters. Opposing austerity would have thus been the logical choice for social democrats: it could have helped them to (re)define their brand by protecting the welfare state from a right-wing onslaught in the name of fiscal responsibility. Opposing austerity, however, was not perceived as a credible strategy by social democratic leaders. After governments implemented large bank bailouts and stimulus packages that emptied the state’s coffers in the wake of the financial crisis, the Greek sovereign debt crisis supposedly demonstrated the danger of too much government debt. High government deficits and debt came to be perceived as threats to economic recovery, which increased the salience of debt as a political problem. As conservative politics were adept at framing the public debate, the public budget developed symbolic importance. As Skidelsky (1970) had observed earlier with reference to the Great Depression, ‘we must not neglect the special symbolic importance of the balanced budget as a sign of “sound” financial policy. There must always be some criteria by which to judge whether a policy is likely to be acceptable or not, and the balanced budget was just such a “rule of thumb”.’ 1⁷ Different authors have used slightly diverging terminology to make this argument: Gingrich and Häusermann (2015) found that the social-cultural professionals have become the core clientele of social democratic parties, while Piketty (2020) argued that highly educated voters are now the key constituency for social democratic parties, which he calls the ‘Brahmin left’.

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Politicians thus believed that voters were becoming increasingly concerned about their country’s public debt, as the political agenda had changed. It came to be perceived as common sense that governments had to pursue fiscal consolidation, and this resonated with voters (see Chapter 4). Members of the electorate have an imperfect understanding of macroeconomics and use simple frames and narratives to reason on this topic. Thus, based on people’s experiences of balancing their private budgets, orthodox fiscal ideas often resonate more with the public than Keynesian ones. Voters buy into the law of ‘folk economics’ (Rubin, 2003) according to which governments should not run budget deficits. Adam Smith (1776, Book IV, Chapter II, pp. 456–7) had expressed this idea earlier; in his words, ‘what is prudence in the conduct of every private family can scarce be folly in that of a great kingdom’. This simple reasoning is much easier to explain than Keynesianism, which relies on complex economic concepts like the ‘paradox of thrift’ or fiscal multipliers. Moreover, Keynesianism depends on faith in the legitimacy and the efficacy of the state, which has been increasingly undermined in recent decades. Influenced by the media and elite cues (Barnes and Hicks, 2018; Bisgaard and Slothuus, 2018), many voters accepted that fiscal conservative policies were necessary. Faced with this political context, social democratic parties had to make a difficult choice: either they could support austerity, risking the dilution of their brand, or they could oppose it, which risked alienating centrist voters whose support was necessary to win office. Opposition to austerity might have been the more popular choice among the social democratic base, but it was not perceived as credible. Confronted with this dilemma, social democratic parties adopted an office-seeking strategy. Moving towards fiscal conservatism was supposed to increase their claim to competence, a key feature of mainstream parties. They converged with the centre-right and adopted austerity in order to appear electable and fit to govern (Kraft, 2017). Accepting the popular discursive notion that government debt had to be reduced, they attempted to increase their reputational capital by profiling themselves as ‘responsible’ actors (Damhuis and Karremans, 2017; Karremans and Damhuis, 2020). This was intended to extend their electoral coalition by moving them closer to the pivotal voter. Faced with growing electoral volatility and the decline of core constituencies, party leaders sought to attract centrist voters who they believed to be fiscal conservatives. Such strategic attempts to establish the fiscal credibility of social democratic parties were particularly important in countries where those parties had been in government when the financial crisis hit in 2008. In these countries, the recession had shattered the economic credibility of social

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democrats, and when the financial crisis turned into a fiscal crisis of the state, they attempted to regain this credibility by supporting fiscal consolidation.1⁸ Failure to balance the public budget and reduce the level of government debt was seen as a matter of incompetence, and thus the government’s budget became a valence issue (Stokes, 1963).1⁹ Overall, the supposed need to signal fiscal competence to voters became the overriding motivation for the fiscal policy of social democratic parties. As the Great Recession was primarily viewed through the prism of debt, the question of how to reduce that debt became all-consuming. The programmes of social democratic parties thus became victims of the political agenda and the dominant discourse: they were designed to convince voters that social democrats were fiscally responsible and could be trusted with the state’s coffers. In order to signal fiscal credibility, however, social democratic parties accepted a position that threatened to undermine their historic support for state intervention and the welfare state, which created inconsistencies in their platforms. To close the perceived credibility gap, they offered programmes that were in themselves incredible. How did they legitimize these?

The ideational foundations of social democratic austerity Political parties are constrained by the political agenda, but voters’ preferences are rarely deterministic.2⁰ Parties can often pursue several strategies to secure electoral majorities, cobbling together electoral coalitions in different ways. Moreover, politicians can also influence voters’ preferences. In other words, voters’ political demands cannot be conceived of separately from the supply side of politics. As Hanspeter Kriesi (1998, p. 167) put it, parties give ‘coherence and organized political expression to what otherwise are inchoate and fragmentary beliefs, values and experiences among members of social groups’. This begs the question of why social democratic parties did not engage in a discursive battle against austerity and attempt to change public opinion in their favour by forging an anti-austerity coalition. To explain the reluctance of social democratic parties to oppose public opinion and challenge the perceived importance of reducing public debt, it is 1⁸ As the economic voting literature had predicted (e.g. Duch and Stevenson, 2008; Lewis-Beck and Stegmaier, 2000), social democrats were punished for the state of the economy in many countries following the 2007–8 financial crisis. 1⁹ This was very much in line with Labour’s early fiscal discipline during the Third Way, which had been primarily shaped by the perceived need to increase the party’s fiscal credibility (Clift and Tomlinson, 2007). 2⁰ This section largely draws on an article written jointly with Sean McDaniel that was published in the Socio-Economic Review (Bremer and McDaniel, 2020).

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necessary to understand the ideational pressures for social democratic austerity. In the words of Gourevitch (1986, p. 233), ‘economic reality is rarely so clear that objective circumstances impose themselves on behaviour with no mediation from ideas’. Ideas are marshalled to interpret the world, and they provide a framework for political action. And for macroeconomic policymakers, economists’ ideas are particularly important. As Farrell and Quiggin (2017, p. 270) observe, ‘policy actors care about the advice of professional economists because it helps them deal with specific policy problems and because expert approval casts lustre on their own efforts, providing them with an important resource in battles with other policymakers’. These economists legitimize some policies over others and help political actors to articulate their demands. For social democratic parties, the ideas in question were a combination of New Keynesianism, supply-side economics, and the social investment paradigm, which I collectively call ‘supply-side Keynesianism’. In combination with normative ideas relating to the state and inequality, these economic concepts shaped the way in which social democratic parties engaged with austerity and helped them legitimize these policies internally. To recognize this, one has to go back to the 1970s. As we have seen, following the Second World War, Keynesianism provided a strong intellectual basis for social democratic parties. It demonstrated how the interest of the working classes could be accommodated in a free-market economy by showing that private ownership of the means of production could be reconciled with the democratic management of the economy (Hall, 1989, p. 207; Przeworski, 1985). Social democratic parties thrived as managed capitalism generated the economic growth and prosperity used to build the welfare state. Yet repeated economic crises and the occurrence of stagflation in the 1970s challenged the economic paradigm that combined Keynesian demand management and welfare state expansion with capitalism. This set of circumstances provided space for monetarism and new classical economics—embraced by the conservative governments of Margaret Thatcher and Ronald Reagan—to become dominant, ushering in a new economic era that presented a major challenge to the centre-left (Blyth, 2002; Hall, 1989; Matthijs, 2011).21 Beginning in the 1980s, however, economists such as Olivier Blanchard, Ben Bernanke, Greg Mankiw, and Paul Romer began to integrate Keynesian macroeconomic theory with the microeconomic models used by neoclassical economists. Although they accepted the core of the influential Lucas critique 21 In this environment, European social democratic governments, including the Labour government under Callaghan in the UK and Mitterrand’s socialist administration in France, also abandoned Keynesian economic programmes and embraced deflationary fiscal policies.

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(Lucas, 1976)—conceding that economic agents are rational—they introduced nominal rigidities in their models, i.e. the idea that prices are staggered or sticky and only adjust slowly or periodically (e.g. Calvo, 1983; Taylor, 1979). This fusion of the major macroeconomic schools of thought allowed New Keynesians to show that output gaps can exist in the short run even when assuming that all economic agents are rational. Although output was efficient in the long term, this provided a much-needed justification for policymakers to stabilize the economy in the short run. Yet given that the long-run equilibrium is unaffected by demand forces in the New Keynesian framework, it was necessary to turn to supply-side arguments to justify state intervention in the long term. These arguments emphasize that growth is determined by supply-side factors such as labour productivity as well as labour and product market institutions. While conservative supply-side economists in the United States had originally used this idea to argue for lower taxes and less state intervention, left-leaning economists now contended that state investment in human and physical capital was crucial for determining long-term growth and increasing productivity. This claim was formalized by the work of Paul Romer (1994) on endogenous or ‘new growth’ theory. In combination, New Keynesianism, new growth theory, and the social investment paradigm provided social democrats with a novel but powerful rationale for state intervention to improve market outcomes. Scharpf (1991, p. 270) had originally argued that ‘the hour of supply-side policies has always been the hour of employers and conservative parties’. But social democrats also began to champion supply-side policies in the late 1980s and 1990s (Boix, 1998; Garrett and Lange, 1991). They accepted the dominance of the market as the fundamental mechanism of economic allocation and increasingly believed that they could spend their way neither to growth nor equality. Social democrats, therefore, began to ‘search for a “virtuous circle” in which higher productivity continues to attract private capital but allows for higher wages and for higher taxes, which are then employed to sustain and increase domestic productivity’ (Boix, 1998, p. 30). Social democrats across the world latched onto this search because it allowed them to redefine the purpose of state intervention. For many Third Way social democrats, their formative life and career experience was rooted in the 1970s; they had witnessed that era’s economic crises and stagflation, which were largely caused by supply-side problems. Many had thus come to believe that the left could not just focus on redistributing the proceeds from economic growth any longer. Instead, supply-side Keynesianism promised something better: it presented an argument for why the state had to involve

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itself in the process of wealth creation (Miliband, 1994). In this way, the centre-left tried to overcome one of its biggest weaknesses: the perception that it was good at distributing growth but lacked a theory of production. Third Way social democrats enthusiastically embraced the notion that the state could deliver such growth, and developed a technocratic approach to politics. This approach became extraordinarily successful in the late 1990s and 2000s. As argued earlier, it contributed to an astounding electoral comeback and coincided with an era of remarkable economic stability. In the 1990s and the early 2000s, it seemed like governments in the advanced economies had successfully fended off the risks of severe financial and economic crises, which reinforced the dominance of supply-side Keynesianism among the left. However, the marriage between social democracy and supply-side Keynesianism became more difficult in the context of the Great Recession. After an initial period of fiscal activism, social democrats followed the centreright and turned to austerity. Why, then, did supply-side Keynesianism help to legitimize austerity among them? In the short term, New Keynesians believe that during crisis periods government spending is necessary to sustain demand; this is because of nominal rigidities, which prevent the economy from operating at a level close to its potential. Yet, there are three caveats when it comes to demand management that is grounded in the central tenets of supply-side Keynesianism. First, New Keynesianism reduced the importance of the output gap in comparison to Keynes’ theory. Originally, Keynes argued that supply is stable while demand fluctuates, which leads to output gaps. He argued against classical economists who believed that swings in output were caused by external shocks to the economy, based on Say’s famous dictum that supply creates its own demand. The synthesis on which New Keynesianism was based combined both arguments: output gaps still exist in the short run, but the potential or efficient output varies in response to shocks. It can move upwards and downwards and does not grow continuously. Importantly, New Keynesianism accepted that there was a non-accelerating inflation rate of unemployment (NAIRU), as introduced by Tobin (1980). This concept refers to the unemployment rate that is consistent with maintaining stable inflation.22 In response to an economic shock, governments should use macroeconomic policy to close the output gap, but only up to the point at which the economy is reaching the NAIRU and is operating at its potential. 22 The idea is closely related to the natural rate of unemployment, which is a concept coined by Milton Friedman (1968).

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This potential might be lower than the potential before the economic shock and hence, the macroeconomic response prescribed by New Keynesians is generally smaller than that of traditional Keynesians. Second, according to New Keynesianism, the government’s role in the stabilization of the economy is limited (Iversen and Soskice, 2006, p. 437). With the ascendance of independent central banks, which can avoid the time-inconsistency problem that Kydland and Prescott (1977) had identified, monetary policy became the primary means to manage demand. It was regarded as more effective than fiscal policy in the New Keynesian model because the output gap in the short run is usually the result of an intertemporal mismatch between demand and supply. Assuming that the interest rate is effectively the relevant price that affects the intertemporal allocation of demand, monetary policy can quickly and directly affect demand in response to an economic crisis. In contrast, fiscal policy affects demand more slowly and less directly. There is usually a lag in its implementation and effectiveness and, as long as the economy is not in a liquidity trap, it is less effective than monetary policy in stabilizing that economy. As a result, monetary policy became the dominant macroeconomic policy in advanced economies and the rise of independent central banks depoliticized demand management (Iversen and Soskice, 2006). There was a consensus that fiscal policy should be used to attain medium- and long-term goals, while monetary policy would be used to manage demand in the economy in the short run. This view was reinforced by the Great Moderation, when monetary policy conducted by an independent central bank seemed well equipped to steer the economy singlehandedly. Robert Lucas (2003, p. 1) famously said in his Nobel Prize speech that the ‘central problem of depression prevention [had] been solved’. Third, supply-side Keynesians believe that the state has a fundamental role in generating long-run growth in an economy; that of investing in human and physical capital and by providing public goods that markets do not deliver. This argument was most forcefully made by proponents of the social investment paradigm, who influenced the centre-left during the Third Way era. For some social democratic parties, including New Labour, social investment (e.g. Hemerijck, 2017; Morel et al., 2012) helped to justify a shift away from the traditional social democratic goal of equality of outcomes towards a focus on ensuring equality of opportunities (Blair, 1998, p. 3). Based on a supplyside perspective, the paradigm emphasized that against the background of large structural transformations, including globalization, deindustrialization, and technological change, there were ‘new social risks’ (Bonoli, 2007; Häusermann, 2010) that traditional welfare states did not address. Aimed at creating human capital, for example through active labour market policies,

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public childcare provision, or education, social investment was supposed to both modernize the welfare state and contribute to economic growth. Yet, for the state to play this role it needs to retain the capacity to act in the long term. This presents policymakers with an important intertemporal trade-off: as the government stimulates the economy and incurs more debt in the short run, the cost of servicing this debt in the long term also increases. This is problematic for two reasons: first, it places a higher burden on future taxpayers and raises concerns of intergenerational equity; second, it has the potential to limit the capacity of the state to act in the long term as governments have to use a large share of their budget for interest rate payments and, increasingly, become dependent on financial markets to refinance their debt. Fiscal policies thus need to be concerned with the sustainability of public finances, which leads to what Haffert and Mehrtens (2015) call the ‘progressive consolidation thesis’. These ideas significantly differ from those of neo- and ordoliberalism, although there is some overlap, as Mudge (2018) shows. Neoliberalism implies that state intervention in the economy is costly and should not aim to correct inequalities, while social democrats argue that the state needs to intervene in the economy. They share this support for state intervention with ordoliberals, but these two schools of thought are set apart by the type of intervention that they prescribe. Social democrats have a more positive vision of the state, which, in their view, has a fundamental role to play in generating long-run growth. This also allows social democrats to combine supply-side Keynesianism with an ideational framework that champions equality and the welfare state, as long as it contributes to innovation and the long-run accumulation of human capital—an innovation of ‘new growth theory’ that was not present in earlier instances of deflationary social democratic policies in the 1970s and early 1980s. Although social democratic parties may have had difficulty reconciling redistribution with austerity in practice, the framework of supply-side Keynesianism sketched a theoretical framework for doing so. Based on these ideas, therefore, social democratic parties and progressive leaders had already opted for fiscal consolidation at the end of the twentieth century in other contexts. Following Mitterrand’s tournant de la rigueur, for example, the centre-left in the United States and Sweden pursued fiscal consolidation. Both Bill Clinton and the Swedish Social Democratic Party (SAP) adopted the progressive consolidation thesis and attempted to rebalance their budgets to retain the capacity of the state to act in the long run. Similarly, in response to the Great Recession, the central tenets of supply-side Keynesianism also played a central role in legitimizing austerity within the

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(centre-)left and, by extension, contributing to the broad acceptance of austerity in Europe from 2010 onwards. They limited the imagination of social democrats and undermined their ability to interpret their strategic interests and the economic world around them in a different light. Lacking any new ideas, social democrats were ready to shift from emergency Keynesianism to fiscal consolidation quickly. They believed that central banking could do the heavy lifting in terms of demand management, while fiscal policy had to pursue other objectives once the immediate ‘firefighting phase’ of the financial crisis was over.

Social democratic parties, paradigm change, and the Great Recession The existence of electoral and ideational pressures for austerity still begs the question of why these pressures were so pervasive. Following Thomas Kuhn (1962), Peter Hall (1993) suggests that paradigm change occurs when anomalies accumulate that the existing theory cannot explain. He defines policy paradigms as ‘a framework of ideas and standards that specifies not only the goals of policy and the kind of instruments that can be used to attain them but also the very nature of the problems that they are meant to be addressing’ (Hall, 1993, p. 279). Given that austerity policies have not worked and that they have hurt traditional social democratic constituencies, the existing literature on social democracy in the context of the crisis can explain neither the lack of a paradigm change nor the fact that social democratic parties had barely attempted to push for such a paradigm change in the first place (e.g. Bailey et al., 2014; Coates, 2017; Keating and McCrone, 2013). To explain why this happened, we need to rethink the question of when paradigm change is likely. Economic ideas do not exist in a vacuum; rather, they interact with strategic, electoral interests to shape economic policies. As shown in Table 2.1, mainstream parties need to be open to new ideas to allow Table 2.1 Paradigm change and the interplay of ideas and electoral constraints Electoral constraints High

Low

Parties open to new ideas

Ideational conflict within existing parties

Paradigm change pushed by existing parties

Parties closed to new ideas

Status quo

Emergence of new parties

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for paradigm change. However, on their own, ideas are not deterministic; they matter most if they are aligned to the perceived material (or electoral) interest of politicians. In other words, paradigm change is often constrained by the prevailing political agenda, which influences public opinion in interaction with previous political legacies. Mainstream parties can thus push for a paradigm change when they are open to ideas that question the dominant paradigm and when the electoral space exists to mobilize these ideas. In the short term, it is extremely difficult to bring it about if the voters do not believe that it should happen, i.e. when electoral constraints are high and prevent politicians from articulating new ideas. Instead, one can expect this situation to lead to ideational conflict within political parties, as leaders struggle to reconcile their ideology with the dominant public opinion. If public opinion gives parties sufficient electoral space but existing parties are closed to new ideas, one can expect the emergence of new parties (that can eventually become carriers of a new paradigm); otherwise, the status quo persists. In most circumstances, vote- and office-seeking politicians of mainstream parties are thus not the right actors to push for paradigm change in the short term: they have to pay attention to the political discourse and the existence of issue publics, which are shaped by the legacies of previous policies and programmes. In the worst case, politicians can only strategically move in the existing issue space, positioning themselves vis-à-vis other parties. During the Great Recession, more conservative, credibility-based calculations triumphed because social democratic parties did not have good alternative ideas. As the 1970s had already shown, amidst uncertainties, politicians often fall back on policies that they have used in the past (Hall, 2013, p. 143). There were certainly some social democrats who promoted thinking that was opposed to austerity. However, these politicians were often positioned at the margins of their parties and their opinions did not get a fair hearing because the need to signal credibility had become the overriding electoral consideration. Party leaders are not economists but political animals, whose actions are, first and foremost, guided by their short-term electoral instincts. Especially over time—in the medium-to-long term—elites can influence public opinion. They can put forward narratives and frames to explain what needs to be done or not done, whether today or in the future. This process is often slow, and it relies on leaders playing with new ideas that rally the public against the previous paradigm and shore up support for the new one. Social democratic actors were unable to take up this role in the wake of the Great Recession. They believed that they could not sell a continuation of expansionary fiscal policies to the electorate after 2010 because they faced two problems: they were both trapped and divided, which undermined

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their ability to push for ideational renewal. In the absence of a clear new economic paradigm, they combined short-term electoral opportunism with technocratic policy initiatives and convinced themselves that austerity was necessary. On the one hand, social democratic parties faced an electoral trap: their electoral constituency had already changed significantly as the result of the policies that they had implemented before the crisis. As Esping-Andersen (1985, p. 322) stresses, economic policies have distributional consequences, including the potential to fragment and divide the electorate. This is what happened to social democracy in the late 1990s and early 2000s. The Third Way was based on the fundamental belief that the electoral road to power leads through the centre, a strategy that many social democrats had internalized before the Great Recession. Their core constituency had shrunk with the end of Fordism, which also brought a weakening of trade unions and a decline in electoral stability and class voting (Evans and Tilley, 2017; Rennwald and Pontusson, 2021). However, the realignment of voters was also partly the result of policies that social democratic parties had pursued before the economic crisis as part of the Third Way. It weakened the ties between the centre-left and their core voters and created space for new challenger parties to emerge (e.g. Die Linke in Germany). Instead, social democratic parties increasingly appealed to middle-class voters, who became their core constituency. During the Great Recession, therefore, social democrats had to adjust their economic policies to the perceived preferences of this constituency. Moreover, as a result of the Third Way, the complexity of building an electoral coalition between the expanded middle class and the working class had also made this task more difficult. This left social democratic parties electorally exposed when the crisis hit, facing a dilemma that was not unique in the history of social democracy. As Kitschelt (1994, p. 93) had observed earlier with reference to the 1980s and 1990s, social democrats ‘faced a catch-22 between outright electoral decline and ephemeral, transitory electoral success: either they promised austerity policies that initially boosted their support but contributed to their latter gradual electoral decline when enacted, or they remained true to their run-of-the-mill Keynesian economic prescriptions and were kept on the opposition benches’. In the wake of the 2007–8 financial crisis, this dilemma returned with a vengeance. Trapped by the electoral consequences of their previous policies, social democrats chose austerity over ambitious Keynesian programmes. On the other hand, these parties also faced an ideational trap. The ideas and policies that they had implemented before the economic crisis had crowded

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out any alternatives. As Galbraith (1958, p. 20) had already argued, ‘ideas are inherently conservative. They yield not to the attack of other ideas but …to the massive onslaught of circumstances with which they cannot contend’. In 2008, many observers expected the financial crisis to present such circumstances. For example, in 2009, the former Chairman of the Federal Reserve Alan Greenspan famously stated: ‘the whole intellectual edifice collapsed in the summer of last year’ (Andrews, 2008). Yet, over time, the conventional interpretation of the Great Recession became a different one: economics may have been wrong with regards to finance, but it had provided for a coherent macroeconomic response, as the immediate response to the financial crisis was relatively successful.23 Massive interventions by national governments and central banks saved most countries from a disaster of the same magnitude as the Great Depression. The relative success of the immediate response to the crisis undermined the intellectual renewal that some, at its beginning, had expected to result from it. Although macroeconomists recognized that some of their economic models were fundamentally flawed, policymakers did not. For social democratic parties, this ideational trap was compounded by the experience of the eurozone crisis. While the greatest economic pain for the crisis-ridden debtor countries only began in 2010, other economies fared better after the initial shock caused by the collapse of Lehman Brothers. Germany in particular bounced back quickly: unemployment remained relatively low and continuously declined after 2010, as the country’s export-oriented economy returned to growth. This facilitated a one-sided economic interpretation of the crisis (see Chapter 7). Conventional wisdom attributed Germany’s success to Agenda 2010, a set of supply-side reforms that the centre-left government had implemented in the early 2000s. In Europe, the crisis, therefore, increasingly came to be seen as a morality tale of saints and sinners (Matthijs and McNamara, 2015), a viewpoint which also influenced social democrats. It prevented them from disavowing supply-side Keynesianism, as the German SPD and other European social democratic parties remained trapped by their previous discourse. The problem for these parties was compounded because they were internally divided. Social democratic parties, like the voters they represent, are not homogeneous entities. As Sartori (2005, p. 23) pointed out, parties consist of different ‘factions’ and ‘currents’. This is especially true of the centre-left today: they are a collection of interests rather than a coherent ideology group. 23 This conventional interpretation is, for example, captured in many memoirs of policy leaders of the time (e.g. Bernanke, 2015; Brown, 2017; Darling, 2011; Geithner, 2014; Steinbrück, 2010).

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Most social democratic parties were originally founded on a reformist platform, but many of them also unite a heterogeneous and complex set of groups that are opposed to unfettered capitalism. More than other party families, social democratic parties represent a variety of different constituencies and interests. Schattschneider (1960) suggested that parties always have to integrate a plurality of different interests by developing a shared normative perspective, allowing them to mould these into an overarching programme. However, during the Great Recession, social democratic parties struggled to live up to this task: left-wing factions within them were radically opposed to austerity, while the pragmatic Third Way social democrats were clinging on to the progressive consolidation thesis and supply-side Keynesianism in general. In most parties, the conflict between these two factions was decided topdown with reference to strategic considerations. As Przeworski and Sprague (1986, p. 184) put it, ‘elections are just not a vehicle for radical transformations. They are inherently conservative precisely because they are representative, representative of interests and values in a heterogeneous society.’ As government debt became an all-consuming issue in 2010, more conservative social democrats appealed to the need to win elections as their ultimate argument, often putting the discussion to rest. They used strategic considerations as a weapon to win intraparty conflicts by presenting austerity as ‘good’ policy in both political and economic terms: in political terms because it supposedly appeals to centrist voters, and in economic terms because it ensures the capacity of the state to act in the long run. The left-wing factions within most social democratic parties were not able to counter these arguments. As Berman (1998, p. 204) notes, ‘ideologies do not achieve resonance or political power on their own; instead, they must be “carried” by political actors capable of implementing political projects and changing the way that people think and act’. For a long time, the anti-austerity forces within social democratic parties lacked such actors who might have been able to carry their ideas. They were disorganized, lacked effective leadership, and had been weakened by the dominance of the Third Way before the Great Recession. In most countries, opposition to austerity was taken up by forces outside the traditional social democratic parties, for example Syriza in Greece, Podemos in Spain, and Jean-Luc Mélenchon’s movement in France. In some countries, left-wing elements within social democratic parties eventually succeeded in winning the intraparty fight and pushed for an anti-austerity agenda (e.g. Portugal, UK). However, this process took time and was fraught with conflict, as the case of the UK indicates (see Chapter 6).

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Conclusion In conclusion, my explanation of social democratic austerity is based on the premise that austerity was a political choice and that the decisions of individual actors, including political parties, are important for the macroeconomic governance of advanced economies. It stresses that we need to take into account both the electoral and ideational pressures to implement austerity in order to explain social democratic parties’ response to the crisis. During economic crises, when macroeconomic policies are highly salient, vote- and office-seeking parties respond primarily to the political agenda, taking into account their potential voters’ preferences and material interests. Ideas and the existing discursive opportunity structures in a given country, however, mediate how electoral interests are turned into party programmes. During the Great Recession, both of these factors constrained social democratic parties. They perceived voters as fiscally conservative after the financial crisis had turned into a fiscal crisis of the state. Moreover, a distinct set of economic ideas based on supply-side Keynesianism limited parties’ imagination and prevented them from opposing austerity. Over time, parties can leverage frames and narratives to promote new ideas and engineer paradigm change, trying to loosen the electoral constraints that they face. During the Great Recession, social democratic parties were unable to do this because they remained trapped and divided. They were trapped by the legacy of the Third Way, which had crowded out other ideas and created internal divisions among their members. It had undermined their left-wing factions, which were disorganized and intellectually weak. These factions had no access to the levers of power within the parties and lacked the necessary influence to lead the charge against austerity. In the absence of such a push for intellectual renewal, social democratic parties instead combined electoral opportunism with technocratic policy initiatives. More conservative, credibility-based calculations triumphed because social democratic parties believed that voters expected sound economic management that would not harm growth in the long term. They adopted austerity in order to appeal to a public opinion that was perceived to be sceptical of government debt and deficits. Despite being driven by electoral considerations, however, this strategy did not guarantee electoral success. In some countries, social democratic parties obtained government office after moderating their position and embracing austerity. But precisely this acceptance of austerity also contributed to their

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electoral decline in the wake of the crisis.2⁴ Social democratic austerity led to a convergence of the fiscal policies offered by the mainstream parties, which not only undermined the functioning of democracy, as the main parties offered voters little choice on one of the most important policy questions of the time (Mair, 2013; Streeck and Schäfer, 2013), but also diluted the brand of social democratic parties (Lupu, 2016). Competing on the basis of a programme fraught with inconsistencies and contradictions, they were able to appeal neither to those centrist voters who were fiscally conservative nor to those voters who opposed austerity. The next few chapters will empirically analyse the causes for this response to the crisis, before the final chapter explores its political consequences more fully (Chapter 8).

2⁴ Again, this development was not unprecedented. Kitschelt (1994) notes that parties that promised austerity had initially boosted their support in the 1980s, but saw their electoral support dwindle afterwards. With reference to work by Luebbert (1991, pp. 227–32), he points out that this was also the case for socialist governments in liberal democracies in the late 1920s: ‘they obtained government office only when they abandoned their more ambitious programs, but precisely the compliance with the liberal economic order also precipitated their political decline’ (Kitschelt 1994, p. 93).

3 The Programmatic Response of Social Democratic Parties to the Great Recession Introduction The Great Recession was a programmatic rupture for social democratic parties.1 In the period leading up to 2008, they had mostly shifted towards the centre and embraced Third Way policies. However, the financial crisis raised new doubts about the merits of this shift. The breakdown of the international financial system exposed the vulnerability of the existing economic order, creating high unemployment and economic uncertainty. Moreover, in response to the European sovereign debt crisis, governments across the continent implemented austerity policies, undermining the European welfare state that social democratic parties had built in the post-war era. How did social democratic parties respond to this crisis in programmatic terms? To answer this question, this chapter examines empirically whether and to what extent social democratic parties changed their economic positions during the Great Recession. The analysis takes as its starting point the conflicting findings of the literature to date. For example, some authors argue that parties change their positions very little over time (e.g. Budge, 1994; Budge et al., 2001). In particular, they portray social democratic parties as parties with a strong ideology and close ties to social movements that constrain their responses to changes in the economy (Adams et al., 2009). Other authors, in contrast, argue that social democratic parties have radically changed their positions in the past few decades. In response to globalization they have shifted to the right, resulting in a ‘neoliberal convergence’ of centre-left and centre-right parties (e.g. Glyn, 2001; Mishra, 1999). In this chapter, I test which of these expectations was borne out in the case of the Great Recession. I use an original data set, based on media analysis carried out in eleven Western European countries, which allows me to compare 1 This chapter is a modified version of a paper published in Party Politics (Bremer, 2018). Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0003

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the salience that parties attributed to different issues and the positions that they adopted with regard to these issues during electoral campaigns before and after 2008. Analysing this data, I present evidence that social democratic parties shifted their positions towards the left during the crisis, which is contrary to common perceptions (Dalton, 2016; English et al., 2016). However, their positions diverged with respect to different issue categories. On the one hand, social democratic parties defended the welfare state and opposed economic liberalism after the 2007–8 financial crisis, partly reversing their own Third Way. On the other hand, many parties also supported the reduction of government deficits and taxes during the crisis—that is, they joined the chorus of austerity that became the dominant tune during the eurozone crisis. Hence, social democratic parties adopted positions with regard to these three different issue categories (welfare, economic liberalism, and budgetary rigour) which did not neatly align on a single left–right line of conflict. Not only has this created programmatic inconsistencies for social democratic parties but it also suggests that even with regard to economic issues, party competition during the Great Recession cannot be represented on a single programmatic dimension (Otjes, 2016).

Party positions, issue salience, and the economy There is a large body of literature that studies the platforms on which political parties compete. Influenced by the median-voter theorem of Downs (1957), many scholars view parties as vote-seeking (e.g. Huber and Powell, 1994; McDonald and Budge, 2005). They argue that there is a close link between the positions that parties take and the preferences of the electorate. Consequently, party elites systematically respond to variations in the distribution of voters’ preferences, which is a process that Stimson et al. (1995) called ‘dynamic representation’.2 However, given that large shifts in the distribution of voters’ preferences are rare, parties’ programmes remain relatively stable over time. As a result, many scholars shifted their attention towards studying salience (Bélanger and Meguid, 2008; Budge et al., 2001; McDonald and Budge, 2005). They focused on ‘issue emphasis’ (Budge and Farlie, 1983) because ‘[v]arying emphases on issues are by and large the only way that parties express their policy differences’ (Budge et al., 2001, p. 82). Based on the notion of ‘issue ownership’ (Petrocik, 1996), parties are assigned different 2 There is some evidence for the plausible alternative hypothesis that parties respond to fluctuations in the preferences or priorities of their constituencies and not those of the entire electorate (e.g. Ezrow et al., 2011).

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levels of competence in different policy areas, and it is in their interest to selectively emphasize those areas in which they outshine their competitors. However, voters’ prioritization of different issues can change between elections (Bélanger and Meguid, 2008; Petrocik, 1996; Petrocik et al., 2003). Thus, parties are expected to change the salience that they attribute to different issues, even if they hardly change their positions over time. The conclusion that party positions are relatively stable is shared by two other strands of the literature. On the one hand, the classical work by Lipset and Rokkan (1967) argues that parties are rooted in cleavages. These cleavages are comparatively constant and given that parties have distinct cleavage locations, they limit the positional manoeuvrability of existing parties in response to external shocks (Hooghe and Marks, 2018). On the other hand, other authors, who view parties as policy-seeking, also consider the parties’ positions to be relatively stable (Dalton and McAllister, 2015; Müler and Strøm, 1999; Strøm, 1990). From this perspective, the parties’ positions reflect the beliefs of their leaders, which, in turn, are shaped by the parties’ core ideologies. Ideologies provide actors with a general frame of reference, allowing them to understand and interpret events. Assuming that these ideologies are sticky, this viewpoint also expects that parties will not radically change their positions. Left-wing parties are said to be particularly resistant to changing their positions for two reasons (Adams et al., 2009). First, left-wing parties have historically had stronger ideological ties than other parties. They were born of the labour movement in the nineteenth century and remained committed to engineering social change even after they had abandoned their revolutionary ambitions (Przeworski and Sprague, 1986). Second, social democratic parties have close ties to trade unions and social movements that restrict their ideological flexibility, even if these ties have weakened in the past few decades (Kitschelt, 1994; Piazza, 2001). However, the problem with many of these studies is that they examine party competition in a vacuum and ignore the role of contextual factors. Only recently have authors begun to explicitly study the importance of economic conditions for party competition (Adams et al., 2009; Haupt, 2010; Ward et al., 2011, 2015). Much of this research studies the effect of globalization on political parties and is closely related to research in political economy which has argued that globalization constrains state intervention in the economy (Berger, 2000; Strange, 1996). Paradoxically, this research has also singled out social democratic parties to make its case (Garrett and Lange, 1991; Scharpf, 1991; Ward et al., 2011). Assuming that globalization makes it increasingly difficult for social

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democratic parties to correct undesirable market outcomes, it is said that these parties have abandoned their core ideologies and increasingly embraced orthodox policies. Globalization has thus diminished the policy differences between the left and the right and paved the way for a ‘neoliberal convergence’ of mainstream parties (Callaghan, 2000; Glyn, 2001; Mishra, 1999; Pierson, 2001a; Ross, 2000). Although some authors dispute this hypothesis (Allan and Scruggs, 2004; Boix, 1998; Burgoon, 2001), they often agree that globalization forces parties to adapt their political programmes, albeit in a complex and variegated way. Political parties are seen as strategic actors that use different political programmes to respond to domestic and international economic changes.3 The existing research, therefore, presents two different expectations in terms of how social democratic parties will respond to economic changes: some argue that party positions are stable and that parties only selectively emphasize and de-emphasize certain issues, whereas others argue that parties actually adapt their programmes in response to the domestic and international economic context. Which of these conclusions holds up when we consider the response of social democratic parties to the Great Recession?

The response of social democratic parties to the Great Recession: some expectations The Great Recession was a structural break in the development of the advanced economies. It was triggered by the mortgage crisis in the United States and became a full-blown financial crisis in September 2008, when the investment bank Lehman Brothers collapsed. This bankruptcy sent shock waves through the international financial system and created a deep economic recession across almost all advanced capitalist countries. Europe was hit especially hard because, in 2010, the ‘American’ financial crisis turned into a ‘European’ sovereign debt crisis. The Great Recession thus became a critical juncture that altered long-term trends of political conflict in Europe (Bremer et al., 2020; Hutter and Kriesi, 2019). One important trend prior to the Great Recession had been the increasing importance of non-economic or cultural issues to party competition (Franklin et al., 1992; Hooghe and Marks, 2009; Kitschelt, 1994; Kriesi et al., 3 In principle, this approach does not necessarily contradict the research, which finds that party positions are relatively stable. While many of the authors who emphasize stability study the basic dimensional position of parties, those predicting change tend to focus on individual issues.

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2008). Yet the crisis increased economic grievances throughout Europe and presented all political actors with an acute set of economic problems. Given that materialist concerns become more important for the electorate during times of economic hardship (e.g. Margalit, 2013; Singer, 2011; Traber et al., 2017), it seems likely that all political parties would have attempted to capture the public mood by increasing the salience of economic issues after 2008. Still, the crisis may not have affected all parties equally because they ‘own’ different political issues (e.g. Green and Hobolt, 2008; Petrocik, 1996; Wagner and Meyer, 2014). Although the economy is usually addressed by all parties, social democratic parties are historically associated with issues relating to social solidarity. Therefore, I would expect them to have increased the salience they attached to economic issues more than other parties, which are less concerned with social justice (e.g. conservative parties) or more associated with non-economic issues (e.g. the Greens or the populist radical right). In response to the economic turmoil, it also seems likely that social democratic parties would have changed their positions on economic issues. Many of the studies showing that the positions of parties are relatively stable focused on long-term trends during periods of relative economic stability. In contrast, a growing literature in political economy emphasizes the importance of crises as critical junctures (Capoccia and Kelemen, 2007; Collier and Collier, 1991). Politics may appear stable during ‘normal times’ due to path dependency (Pierson, 2000), but crises shake the foundations of existing social systems. The resulting uncertainty allows policy entrepreneurs to engineer institutional transformations (Capoccia, 2015) and often leads to institutional, political, and policy changes with significant legacies (Gourevitch, 1986). They create the perfect preconditions for paradigm change (Hall, 1993) because the uncertainty associated with them opens up windows of opportunity, during which ideas can serve as explanations of what has gone wrong and provide answers as to how to fix it (Blyth, 2002; Matthijs, 2011). For social democratic parties, the Great Recession should have been such a critical juncture because it provided them with a golden opportunity to renew their traditional socioeconomic programmes. Importantly, this opportunity did not exist for other party families to the same extent. Some of them already had more leftist positions before the Great Recession (e.g. far-left parties), while others (e.g. conservative parties) could not shift their positions leftwards due to the pro-market ideologies that they adhered to. Hence, I would expect the effect of the crisis to have been particularly large for social democratic parties.

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Table 3.1 List of economic issue categories (adopted from Kriesi et al., 2008) Categories Welfare Economic liberalism Budgetary rigour

Description of left-wing positions Support for the welfare state and redistribution through taxes and benefits Opposition to competition, deregulation, and privatization Opposition to a rigid budgetary policy and the reduction of taxes (without an explicitly redistributive character)

However, the impact of the crisis was not uniform across all economic issues. Importantly, in its wake, one has to distinguish between three issue categories: (1) those that relate to the welfare state and redistribution; (2) those that relate to economic liberalism; and (3) those that relate to the government’s budget (see Table 3.1). It is necessary to make this distinction to capture the complex political impact of the crisis. The crisis was widely interpreted as the result of excessive liberalization of the financial system. This presented centre-left parties with a window of opportunity to oppose economic liberalism and distance themselves from the causes of the Great Recession. Similarly, low-income households, which social democratic parties claim to represent, were particularly at risk during the Great Recession due to the increase in unemployment and economic uncertainty. Thus, the Great Recession also provided social democratic parties with an opportunity to renew their support for the welfare state. Yet, with regard to macroeconomic policies, social democratic parties had less leeway to change their policies. Most governments stimulated the economy immediately after the financial crash in 2008, but leading policymakers quickly demanded austerity when the financial crisis turned into a sovereign debt crisis. Conventional wisdom held that this crisis had been caused by excessive government debt and ‘irresponsible’ behaviour on the part of the debtor countries. Deficit spending became a taboo and social democratic parties were thus forced to accept austerity measures in return for bailout packages from the European Union and the International Monetary Fund (e.g. in Greece and in Portugal). Parties in creditor countries, and outside the eurozone, generally accepted this shift to austerity too. For example, the German Sozialdemokratische Partei Deutschlands (SPD) supported the introduction of a constitutional debt brake as early as 2009 and promised to reduce government debt as one of the key pillars of its economic programme in 2013 (SPD, 2013). Similarly, the Labour Party in the UK accepted the need for fiscal consolidation. The party opposed the spending cuts carried out by the Conservative government, but it also promised to ‘balance the books and deliver a surplus on the current

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The Programmatic Response

budget and falling national debt in the next Parliament’ (Balls, 2014b) before the 2015 election. We thus need to disentangle issues that relate to the government’s budget from other economic issues. In particular, it is likely that centre-left parties did not shift to the left with regard to budgetary issues during the crisis. Rather, they more often addressed these issues to signal their own economic competence and to appeal to fiscally conservative voters, who favour balanced budgets. Facing attacks from other political parties, they attempted to present themselves as economically competent and responsible.

Data and methods In order to analyse the programmatic response of social democratic parties to the Great Recession, I studied the platforms on which parties compete before elections. Electoral campaigns provide a good indicator of party positions because parties have to develop a coherent programme before elections and, thus, their positions crystallize. In this chapter, I use an original data set that measures party positions by analysing how they are represented by the mass media during electoral campaigns (Kriesi et al., 2020). This type of data is appropriate for studying the response of parties to the crisis for three reasons. First, the data allows me to analyse both the salience that parties attribute to economic issues and the positions that they take towards these issues, which are important aspects of party competition in the twenty-first century. Second, the data shows the positions that parties adopt in public discourse and, thus, reflects their positions on the most important issues of the day. This should have made any changes induced by the crisis more visible than in other sources. Finally, the data enables me to disentangle economic issues and sort them into different issue categories, which was necessary in order to understand party competition in the context of the economic crisis. Unfortunately, the data also has some shortcomings. Most importantly, media biases might misrepresent some actors and provide limited information about small parties and non-salient issues. Alternative data sources avoid such biases. In particular, the Manifesto Project (MARPOR) (Volkens et al., 2017) has created a large database that is commonly used to study party positions. However, this manifesto data cannot be used in this chapter because the coding scheme does not capture positive and negative stances, which are necessary to calculate positions (Dolezal et al., 2014; Gemenis, 2013), for all the issues relevant for my analysis. Most importantly, the data from MARPOR did not allow me to disentangle economic issues as

Data and methods

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described earlier. Therefore, I use media analysis to study parties’ positions on sub-issues (Helbling and Tresch, 2011). Specifically, the following analysis is based on the detailed coding of newspapers during thirty-one election campaigns in eleven different Western European countries. These countries include seven northern European (Austria, France, Germany, Ireland, Netherlands, Switzerland, and the UK) and four southern European countries (Greece, Italy, Portugal, and Spain). In each country, I used the last election prior to the beginning of the crisis in 2008, against which I compare all electoral campaigns that took place from 2009 to 2015.⁴ The newspapers used for this analysis and the detailed list of the electoral campaigns and their classification are included in Online Appendix A. From each newspaper, a representative sample of relevant articles were coded by means of core sentence analysis (Kleinnijenhuis and Pennings, 2001), which records the relationship between a subject (an actor) and an object (another actor or an issue) on a scale from –1 to +1. In total, the resulting data set contains 81,159 core sentences and for each election, I have, on average, 2,136 core sentences. The actors mentioned in the newspapers were coded based on their party affiliation, while the issues were coded inductively and classified into more than 200 categories. From these categories, I created three meta-categories of economic issues, as shown in the Online Appendix A: welfare, economic liberalism, and budgetary rigour. Following Kriesi et al. (2008), I assume that all other issues are embedded either in a second, cultural dimension of political conflict or in neither of the two dimensions.⁵ To test my expectations, I use the data to compute two key measures for each party for the individual issue categories: salience and left–right position (see Online Appendix A). Salience for each party on an individual issue is simply the share of core sentences that a party devoted to a given issue compared to all core sentences coded for that party during the election campaign. The left–right position for a party on a given issue is the average direction of all statements about that particular issue, which ranges from –1 to +1, where –1 is the left and +1 the right end of the spectrum. Afterwards, I also calculate the salience and left–right position for every party on the aggregate level, i.e. for all economic issues. In this case, salience is simply the sum of the salience for all three individual issue categories. The aggregate ⁴ Elections that occurred in 2008 are excluded from the analysis due to their proximity to the breakdown of Lehman Brothers in September 2008. ⁵ The approach excludes economic issues that have a European dimension from the analysis (e.g. Eurobonds or support for the European Stability Mechanism). These issues became more important during the crisis, but they were not politicized in the same way across all the countries studied here. Importantly, in some countries, European integration is still more associated with cultural than with economic issues (Otjes and Katsanidou, 2017), which makes an analysis of European issues more difficult.

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left–right position for any given party is calculated as the mean of all statements from the three economic categories, weighted by the salience of the individual categories. First, I use these measures descriptively to compare the strategies of leftwing parties before and after the beginning of the crisis. In each section, I start by analysing the aggregate changes, but to examine their sources, I also analyse the changes concerning each issue category. Second, I use regression analysis to test whether the effects of the crisis are statistically significant. For this purpose, my unit of analysis is a given party for each national election campaign. In total, this gives me 198 observations across eleven countries. Note that my data is heavily cross-sectional dominant (Stimson, 1985) and, therefore, I use pooled ordinary least square (OLS) regressions to analyse the data. The dependent variables for my analysis are (1) the salience that parties attribute to economic issues and (2) the left–right position that parties take on these issues. My key independent variables are party family and a dummy variable that equals one when the election occurred after 2008 and zero otherwise (for more details see Online Appendix A). The effect of the crisis on any given party family is then tested through an interaction effect between these two variables. This allows the effect of crisis to vary across party families, enabling me to measure its impact on party competition.⁶ To further test the conditionality of the crisis effect, I use a three-way interaction term between party family, my dummy variable, and the unemployment rate.⁷ Finally, I also include other control variables that could potentially explain party positions on economic issues, including unemployment, government debt and deficit, government status, and country-fixed effects. Other confounding variables are not included in the regression models used here due to the small number of observations.⁸

Social democratic parties and the crisis: changes in issue emphasis In response to the Great Recession, political parties were forced to address ‘old’ economic issues (like unemployment) more resolutely, but they also ⁶ For the detailed model specification, please see Online Appendix A. ⁷ The unemployment rate is used as an indicator for the depth of the economic crisis for several reasons: it measures the impact of the financial crisis on the real economy, it is a good proxy for economic grievances, and it is easily comparable across countries. Other possible variables were used as a robustness check, but they did not change the results (e.g. GDP growth). ⁸ Other variables (e.g. Eurozone membership, being a recipient of bailouts, the presence of far-right and far-left parties, and the type of economic system) were included in further models. None of these variables turned out to be significant.

Changes in issue emphasis

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had to find answers to ‘new’ issues (like bank bailouts or the stability of the financial system). As a result, the salience that mainstream parties attributed to economic issues increased during the crisis in almost all countries (see Figure 3.1). This change was large in countries hit particularly hard by the crisis (e.g. Italy, Spain, and Portugal), but the salience of economic issues also increased dramatically in other countries (e.g. Austria, Switzerland, and the UK). Moreover, this increase in salience was largely systemic; i.e. changes in salience were not idiosyncratic to individual party families. Instead, the salience of economic issues in the media increased for all party families and, in particular, mainstream parties moved in tandem in response to the crisis.

Austria

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Figure 3.1 Issue salience of all economic issues by party family, country, and period Note: The figure shows the salience that the moderate left and the moderate right attributed to all economic issues (aggregate) before and after the global financial crisis in eleven different European countries.

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It is, therefore, difficult to distinguish between an effect at the party level and an effect at the level of the party system descriptively. To test whether the differences between party families are statistically significant, I use regression analysis, as described in the section ‘Data and methods’. The results of this analysis are shown in Figure 3.2, which plots the average marginal effect of the crisis on the salience that the moderate right and the moderate left attributed to different economic issues. This confirms that social democratic parties increased the aggregate salience of economic issues in response to the crisis. Yet, the average marginal effect of the crisis does not significantly differ for the centre-left and centre-right. As shown in Figure 3.2, the crisis affected the salience that the moderate left and the moderate right attribute to economic issues in a similar way. The full regression

Aggregate

Welfare Category

Party family Moderate left Moderate right Economic liberalism

Budget

−0.2

−0.1 0.0 0.1 Average marginal effect of the crisis

0.2

Figure 3.2 Average marginal effect of the crisis on the salience of economic issues Note: The figure shows the average marginal effect of the crisis on the issue salience that the moderate left and moderate right attribute to different economic issues. It shows the effects from models with four different dependent variables: (1) the salience of all economic issues (aggregate), (2) the salience of welfare, (3) the salience of economic liberalism, and (4) the salience of budgetary rigour. The effects and their 95 per cent confidence intervals are calculated based on OLS regression models. The full regression table is shown in Online Appendix A.

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table shown in Online Appendix A further shows that the interaction terms between party families and the crisis dummy are small and not statistically significant. Moreover, these results do not change if I control for the depth of the crisis by including a three-way interaction effect as described in the section ‘Data and methods’. In terms of salience, the response of social democratic parties was similar in all countries irrespective of the depth of the crisis. Still, it is important to disaggregate these changes into different issue categories. Figure 3.3 plots the salience of these issues separately for social

Austria

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Figure 3.3 Salience of different economic issues for social democratic parties by country Note: The figure shows the salience that the moderate left attributed to different economic issues before and after the global financial crisis in eleven different European countries.

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democratic parties.⁹ It shows that in most countries, social democratic parties increased the salience of welfare and economic liberalism. In contrast, there is no clear pattern in terms of budgetary rigour. While parties in several countries talked more about these fiscal issues, there are other parties that did not. This can again be confirmed by calculating the marginal effect of the crisis on issue salience based on regression analyses (Figure 3.2). On average, social democratic parties talked more about welfare and economic liberalism after the crisis but not about budgetary rigour. It is important, however, to note that the crisis influenced the salience that parties attribute to these issues in a similar way for the moderate right and the moderate left. This indicates that the crisis did not systematically alter the pattern of party competition in terms of salience: parties from different party families attributed a similar amount of salience to different economic issues. Still, parties could have spoken about these issues in very different ways; i.e. they could have adopted different positions. I thus turn towards analysing the positions of social democratic parties next.

Social democratic parties and the crisis: changes in issue positions The economic crisis not only changed the salience of economic issues but also influenced the positions that parties took on these issues. Figure 3.4 compares the left–right positions of the centre-left and centre-right parties before and after 2008. It illustrates that every social democratic party shifted to the left after 2008, except the Labour Party in Ireland and the PvdA in the Netherlands. On average, these parties shifted their aggregate left–right position by 0.15 points. Furthermore, in most countries, the moderate right (as well as other parties not shown in Figure 3.4) moved in the opposite direction to that of social democratic parties. Hence, the crisis led to a divergence of mainstream parties on some dimensions. To test whether these differences are statistically significant, I again use regression analysis. Figure 3.5 shows the average marginal effect of the crisis on the positions that parties adopt. It confirms that the moderate left, indeed, moved towards the left in response to the crisis. In aggregate terms, moderate left- and right-wing had programmes that were very similar before the crisis. In fact, the differences between all mainstream parties on ⁹ Online Appendix A shows the nominal changes for each issue category.

Changes in issue positions Austria

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Figure 3.4 Average party positions on economic issues by party family and country Note: The figure shows the positions that the moderate left and the moderate right adopted on economic issues (aggregate) before and after the global financial crisis in eleven different European countries. The variable is measured on a scale from -1 to +1, where -1 means that a given party takes a left-wing position and +1 means that the party takes a right-wing position.

economic issues had all but eroded. Only the far-left parties had programmes that were significantly different from the mainstream in economic terms (see Online Appendix A). The Great Recession halted and partly reversed this convergence. This holds true when controlling for other factors that could potentially influence a party’s position on the left–right dimension of political conflict, including economic conditions and potential constraints resulting from government responsibility. Party families thus again adopted distinct economic positions after 2008, as partisan theory would lead us to expect. Further analyses again show that this effect was not conditional on the depth of the crisis in individual countries. The crisis was apparently deep

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Aggregate

Welfare Category

Party family Moderate left Moderate right Economic liberalism

Budget

−1.0

−0.5 0.0 0.5 Average marginal effect of the crisis

1.0

Figure 3.5 Average marginal effect of the crisis on economic positions Note: The figure shows the average marginal effect of the crisis on the positions that the moderate left and moderate right took on different economic issues. It shows the effects from models with four different dependent variables: (1) the position on all economic issues (aggregate), (2) the position on welfare, (3) the position on economic liberalism, and (4) the position on budgetary rigour. The dependent variables are measured on a scale from -1 to +1, where -1 means that a given party takes a left-wing position and +1 means that the party takes a right-wing position. The effects and their 95 per cent confidence intervals are calculated based on OLS regression models. The full regression table is shown in Online Appendix A.

enough to induce social democratic parties to shift their positions in all the countries studied here. Still, it remains unclear whether this shift occurred with respect to all the issues categories identified earlier. Figure 3.6 plots the attitudes towards these issues on a scale from -1 to +1, where +1 means that a party is completely opposed to welfare, completely in favour of economic liberalism, or completely in favour of budgetary rigour, respectively. The graph shows that many moderate left-wing parties had been strongly pro-welfare even before 2008, but as the welfare state came under attack during the economic crisis, social democratic parties defended it even more resolutely. Only the Dutch PvdA and the Italian PD shifted to the right and adopted a more ambiguous position towards the welfare state during the crisis.

Changes in issue positions Austria

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Figure 3.6 Average positions of social democratic parties on different economic issues by country Note: The figure shows the positions that the moderate left and the moderate right adopted on different economic issues before and after the global financial crisis in eleven different European countries. The variables are measured on a scale from -1 to +1, where -1 means that a given party takes a left-wing position and +1 means that the party takes a right-wing position.

This picture is similar for the position of social democratic parties as regards economic liberalism, except that many social democratic parties had more ambiguous positions on this before the crisis. Reflecting the policies of the Third Way, social democratic parties in Italy, Greece, the Netherlands, Portugal, Spain, Switzerland, and the UK were in favour of or had an ambivalent position towards economic liberalism before 2008. The social democratic parties in the other countries were not clearly opposed to it either. However, after 2008, social democratic parties shifted strongly towards the left, thereby moving closer to their core ideology again. Most social democratic parties,

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therefore, returned to campaigning for the welfare state and against economic liberalism during the crisis. The positions of social democratic parties with regard to fiscal policy do not follow the same pattern. Many parties already had an ambivalent position as regards fiscal policies before the crisis, but some became even more supportive of budgetary rigour as it unfolded. They shifted their positions further to the right. The centre-left parties in France and Portugal were the only parties that adopted a weakly negative position regarding budgetary rigour during the crisis, shifting to the left in comparison to their positions in the pre-crisis period. Nonetheless, their positions on budgetary rigour were still a lot further to the right than their positions on welfare and economic liberalism, as shown in Figure 3.6. Overall, the centre-left in Western Europe mirrored the positions of the political right and campaigned for lower government debt and budget deficits in response to the crisis. Contrary to the evidence gathered by Maatsch (2014) in a study of parliamentary speeches, this happened in both creditor and debtor countries. Again, these impressions can be substantiated by regression analysis. For this purpose, I repeat the analysis from earlier and use the parties’ average positions on each issue category as dependent variables. The results show that before 2008, social democratic parties had not campaigned on programmes that were significantly different from those of other parties. The crisis changed this, as shown by the average marginal effects in Figure 3.5. Reflecting the newfound scepticism of the moderate left towards (financial) markets, this shift was particularly large for economic liberalism, as suggested earlier. They also continued to support the welfare state and, if anything, became even more supportive after 2008. The crisis, however, did not lead to a differentiation between centre-left and centre-right parties with regard to budgetary policies. On average, the crisis did not influence the position of either party family towards this dimension. Rather, social democratic parties remained supportive of budgetary rigour, thereby adopting positions that are traditionally associated with rightwing parties. Further analyses again show that this convergence on budgetary rigour occurred in most countries and did not depend on the depth of the crisis. Consequently, the Great Recession did not affect all aspects of party competition (on economic issues) equally. Contrary to the common assumption that parties bundle issues together, which leads to consistent policy packages, social democratic parties had a differentiated programmatic response to the crisis: they adopted positions concerning different issue categories that are usually considered to be on different ends of the left–right spectrum.

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Finally, for countries in which more than one election took place during the economic crisis, we can analyse how stable the positions of social democratic parties were in that period. Figure 3.7 shows the average position of social democratic parties in eight countries by election type. It suggests that the most important changes in the programmes of social democratic parties happened before the first election of the crisis period: they shifted towards the left on economic liberalism and, hence, their positions on welfare and economic liberalism converged. At the same time, they shifted slightly towards the right on budgetary rigour. Before the second crisis-period elections took place, social democratic parties followed up on these initial shifts by shifting further to the left on economic liberalism, while shifting further to the right on budgetary rigour. This is additional evidence that social democratic parties turned away from the Third Way during the Great Recession but did not attempt to engineer a paradigm shift concerning fiscal policies. Overall, this created an important inconsistency within the social democratic programme: while austerity might be compatible with state intervention (e.g. by introducing a minimum wage or regulating the financial sector), 0.4

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Figure 3.7 Average positions of social democratic parties on different economic issues by election type Note: The figure shows the average position of social democratic parties on different economic issues in three different types of elections: pre-crisis elections, first-crisis elections, and second-crisis elections. Countries that only had one election from 2009 to 2015 are not shown in the graph. The two elections in Greece in 2012 are treated as a single observation.

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it is not compatible with defending the welfare state. Instead, austerity usually leads to welfare state retrenchment (Armingeon et al., 2016), which would make it very difficult for social democratic parties to implement their programme if they were voted into government again. Further evidence from countries where additional elections were held during the crisis suggests that there are two different ways that social democratic parties resolved this tension. On the one hand, the PS in Portugal shifted its position on austerity towards the left before the election in 2015. On the other hand, PASOK in Greece shifted its position on economic liberalism and welfare to the centre again in 2015 after the far-left party Syriza had successfully established itself as the main actor on the left of the party system. This indicates that social democratic parties adjusted their programmatic positions in the wake of the crisis but did not resolve the internal tensions within their platforms in a uniform way across Europe.

Conclusion In conclusion, the Great Recession systematically changed the platform on which the European moderate left competed in elections. In terms of salience, social democratic parties paid more attention to economic issues again, but this was mirrored by a general increase in their salience for all parties. Centre-left parties moved in tandem with centre-right and liberal parties and emphasized economic issues more during the Great Recession. Overall, the crisis halted a previous trend that had been in progress before its onset and that had seen mainstream parties appeal to cultural issues. In terms of positions, left-wing parties set themselves apart from other parties in response to the Great Recession. Despite the popular perception that the left was absent and failed to defend its core ideology during the crisis, this chapter paints a more nuanced picture. In government, social democratic parties might have struggled to implement their desired policies, but in programmatic terms, social democrats responded to the crisis distinctively: in almost all the countries studied here, they defended the welfare state and became more sceptical of economic liberalism again. Thereby, the centre-left retracted large numbers of its Third Way policies and reversed the neoliberal convergence that had occurred before the Great Recession. Yet these parties did not shift to the left in response to the crisis in all respects. Importantly, social democratic parties accepted the need for fiscal consolidation and budgetary rigour, which created some tensions within their platforms.

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In light of these tensions, it is even more puzzling that social democratic parties accepted the austerity settlement in Europe from 2010 onwards. According to the evidence presented in this chapter, the Great Recession had the potential to create a critical juncture for party competition in some respects: while parties changed the salience that they attribute to economic issues in tandem, they changed their programmes by shifting in different political directions in response to the economic shock. This confirms that parties are strategic actors that respond to changes in their economic context. Still, social democratic parties adopted a rather inconsistent programme in response. They did not shift their positions on all economic issue categories in the same ideological direction, and they bundled together policy packages that did not fall on the same end of the left–right dimension. In particular, the fiscal policies that social democratic parties put forward can be easily squared with neither their support for the welfare state nor their core ideologies. The next chapters will try to make sense of this puzzling response to the Great Recession.

4 Attitudes towards Austerity Analysing the Public’s Debt Aversion during the Eurozone Crisis

Introduction The previous chapter showed that budgetary rigour became a valence issue during the Great Recession. Even social democratic parties accepted the turn towards austerity and endorsed orthodox fiscal policies. Consequently, governments of all partisan stripes and colours across Europe implemented fiscal consolidation in the 2010s. According to a large amount of research in economics and political science, this dominance of austerity is surprising. For a long time, the simple working assumption had been that ‘voters may simply prefer low taxes and high spending, and reward politicians who deliver these’ (Brender and Drazen, 2008, p. 2204). For example, the literature on political business cycles is based on the idea that politicians have an incentive either to buy off voters and thus increase government spending or to reduce taxes prior to elections (e.g. Nordhaus, 1975). Moreover, the prominent rise of anti-austerity parties, movements, and politicians like Syriza, Podemos, and Jeremy Corbyn suggests that austerity has caused a large amount of political discontent among voters (e.g. Bojar et al., 2022; Hübscher et al., 2021; Jacques and Haffert, 2021; Talving, 2017). Still, across most of Europe, the austerity settlement was only challenged on the margins following the financial crisis. In the eurozone, the urgency to consolidate sovereign debt faded over time, but austerity shaped Europe’s post-crisis political economy for a decade. Given that politicians are accountable to their electorate, this persistence of austerity cannot easily be squared with the conventional common belief that citizens support expansionary fiscal policies. In this chapter, I thus analyse public preferences towards government debt more carefully. This analysis is necessary because the cost of government

Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0004

Public preferences towards fiscal consolidation

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deficits and debt are not entirely obvious for citizens, a fact which also distinguishes government debt from other macroeconomic indicators. As Hibbs (1977) argued, the cost of unemployment, for example, is straightforward: it represents lost output and hence a significant majority of citizens care about it. Yet, with regard to fiscal policies, citizens might be more concerned about the distributive consequences of individual policies (e.g. lower social spending or higher income taxes) than about their effect on government debt. In other words, it remains unclear what drives the public’s ‘debt aversion’, that is, the public’s support for fiscal consolidation. To explore this issue, this chapter systematically investigates the debt aversion of individuals across a large number of countries. I use data from the Eurobarometer, which has regularly asked respondents about their attitudes towards fiscal consolidation since 2010. The data shows that a majority of citizens felt uneasy about their country’s government deficit and debt during the eurozone crisis, and my empirical analysis tests how different individualand national-level factors affect the public’s debt aversion. To this end, the chapter draws on a broader literature on macroeconomic policy preferences to derive some theoretical expectations about the correlates of debt aversion. These expectations will then be tested using regression analysis.

Public preferences towards fiscal consolidation Although a large amount of research shows that individual preferences matter for policy outcomes, the existing research is inconclusive about public preferences regarding fiscal consolidation. Originally, the literature on political business cycles assumed that voters support higher government spending due to self-interest (e.g. Nordhaus, 1975) and that as a result, it should be difficult for governments to reduce spending. This claim is also supported by a large body of literature on public choice theory, which argues that parties look after the interests of their constituency but ignore the collective interest. Governments are, therefore, expected to spend excessively on their constituencies, while discounting the cost of excessive government deficits and debt (Alesina and Drazen, 1991; Franzese, 2002; Weingast et al., 1981). The prominent literature on the ‘new politics of the welfare state’ implicitly shared this view. Pierson (1996, 2001b) argued that existing welfare-state programmes are difficult to cut because key social groups and voters would oppose such policies. Depending on the constitutional rules, these groups would use institutional veto points to block retrenchment (Immergut, 1992). Pierson (1996, p. 178) thus emphasized that ‘frontal assaults on the welfare

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state carry tremendous electoral risks’ and that ‘efforts to dismantle the welfare state have usually exacted a high political price’ (Pierson, 1996, pp. 174–5). Even in the face of high deficits, welfare-state retrenchment was seen as unlikely. Empirically, the evidence is mixed. While some authors have shown that fiscal retrenchment on the aggregate level reduces support for the government among voters (e.g. Bojar et al., 2022; Hübscher et al., 2021; Talving, 2017), others have argued that the opposite is true (e.g. Alesina et al., 1998, 2019; Arias and Stasavage, 2019; Bansak et al., 2021; Giger and Nelson, 2011). The former research has largely been motivated by the experience of the Great Recession, during which austerity sowed the seeds for future political upheavals across Europe. In this context, Talving (2017) showed that austerity significantly reduced the support for the incumbent government, while Hübscher and Sattler (2017, p. 151) argued that governments ‘associate significant electoral risks with consolidations because electorally vulnerable governments strategically avoid consolidations towards the end of the legislative term in order to minimise electoral punishment’. For this reason, Bojar et al. (2022) studied the aggregate response to austerity in opinion polls and found that it does indeed exact a high price on the popularity of governments (also see Jacques and Haffert, 2021). In combination with emerging research on the impact of austerity on Brexit (Fetzer, 2019), on the rise of the NSDAP in Germany in the 1930s (Galofré-Vilà et al., 2021), and on social unrest (Ponticelli and Voth, 2020), this research supports the notion that voters oppose fiscal consolidation. However, other research suggests the opposite. Alesina et al. (1998, p. 198) argued that there is ‘no evidence of a systematic electoral penalty or fall in popularity for governments that follow restrained fiscal policies’ and that governments that ‘are willing to cut transfers and the government wage bill— traditionally considered the two most politically charged components of spending—are not punished by the voters’. They even argued that voters systematically punish deficit spending and tax cuts and reward governments that pursue fiscal consolidation. This finding supplements the famous ‘expansionary fiscal contraction’ thesis (Alesina et al., 1998; Giavazzi and Pagano, 1990): not only can fiscal consolidations have an expansionary economic effect, but these consolidation initiatives are also rewarded by voters. Recent research has supported this view. Alesina et al. (2011) analysed data from nineteen OECD countries from 1975 to 2008; the study showed that governments which quickly reduce their budget deficits are not systematically punished (also see Alesina et al., 2019). Similarly, Arias and Stasavage (2019) did not find evidence for a penalty for austerity in a broad set of countries

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from 1870 to 2011. Giger and Nelson (2011) also showed that parties do not face the wrath of the voter when they retrench social policies; instead, some parties even gain votes following retrenchment. Similarly, Bansak et al. (2021, p. 488) argued that ‘austerity …is actually a popular response to economic crises among the voting public’. Barnes and Hicks (2018) and Bisgaard and Slothuus (2018) argued that these findings can be explained by the power of media and elite cues. Both marshal an impressive array of evidence to show that the framing of austerity strongly influences attitudes towards fiscal consolidation, leading Barnes and Hicks (2018, p. 352) to conclude that ‘even if people may not have liked austerity, they have tended to think that it is necessary’. Other research views voters as fiscally conservative in the first place (Brender and Drazen, 2008; Hayo and Neumeier, 2016; Heinemann and Hennighausen, 2012; Kalbhenn and Stracca, 2020; Stix, 2013). From this perspective, voters are opposed to large government deficits and debt. They seem to equate the budget of their government with that of a private household and favour balanced budgets (Blinder and Holtz-Eakin, 1984; Peltzman, 1992).

Differences in debt aversion across individuals and countries Despite widespread debt aversion, it is unlikely that fiscal consolidation is a priority for all voters; rather, we expect there should be variation in the extent to which voters care about government debt, for two reasons. First, the level of government debt is an abstract number that many voters do not fully understand. Second, fiscal consolidation commonly implies significant costs for the electorate because it is often achieved through spending cuts or tax increases. Consequently, there are likely many ‘fiscal conservatives’, who in principle agree with the notion of fiscal consolidation. Yet, there are fewer ‘fiscal hawks’, who strongly support fiscal consolidation and view it as a priority, thereby accepting the costs associated with budget consolidation. This is supported by evidence which shows that the effect of fiscal retrenchment depends on the politicization of these policies during electoral campaigns (Armingeon and Giger, 2008), as well as by evidence which suggests that only some voters turn against austerity, while others do not (Fernández-Albertos and Kuo, 2016). If this is true, however, it begs the question: what determines citizens’ debt aversion? Existing studies usually focus on individual countries, and they use different measures to capture preferences regarding fiscal consolidation. As a

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result, the literature is very idiosyncratic, and it is not clear how well findings travel across countries. Moreover, previous research suggests that individuallevel variables are poor predictors for preferences. For example, Blinder and Holtz-Eakin (1984, p. 146) claim that there is a ‘[long] list of socio-economic variables that apparently, and often surprisingly, have no bearing on support for the balanced budget’. Yet there is a broader literature about citizens’ macroeconomic policy preferences (e.g. Hibbs, 1987b; Jayadev, 2006; Scheve, 2004; van Lelyveld, 1999), which can be used to derive some individual- and national-level characteristics that might play an important role in explaining the public’s debt aversion.

Individual-level factors First and foremost, the literature shows that macroeconomic policies have distributive consequences, for example by influencing unemployment and inflation, which affect the preferences of individuals (Hibbs, 1987b; Scheve, 2004; van Lelyveld, 1999). This should also be true for government debt. In theory, fiscal consolidation can be achieved by increasing taxes, reducing government spending, or a combination thereof. During the Great Recession, most fiscal consolidation plans in Europe were primarily based on spending cuts, which undermined the ability of governments to provide public services and finance welfare-state spending. Lower-income groups are more at risk of unemployment and low or negative wage growth as a result of fiscal consolidation. In addition, they are also more likely to rely on government spending—whether in the form of benefits or through the use of public services—to finance consumption. People with lower incomes should thus be more concerned about the costs of fiscal consolidation, which leads to a positive relationship between income and debt aversion. People who are unemployed and rely on government benefits should be less debt averse since they too are more concerned about the costs of consolidations. Apart from the distributive consequences in the labour market, preferences—especially concerning government debt—should also depend on the ownership of financial assets. Price increases disadvantage small and large ‘rentiers’ because they reduce the real value of their assets. Therefore, creditors who own assets should be more inflation averse than debtors. They rely less on active employment for their income but are more concerned about the value of their assets (Scheve, 2004).1 We would expect creditors 1 An emerging literature also finds that asset ownership influences preferences regarding other economic policies, including redistribution, the welfare state, and financial policies (e.g. Ansell, 2014).

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to be similarly debt averse. They expect to pay for higher government debt through future taxation or inflation and thus they are likely to internalize the costs of fiscal expansions. In contrast, individuals that are credit constrained benefit from government deficits. They rely on active employment to make a living and are more likely to profit from demand stimulus, which raises employment and wages. They also benefit from deficits because government debt shifts the tax burden into the future and thereby effectively provides taxpayers with a loan (Heinemann and Hennighausen, 2012). Thus, creditors should be more supportive of fiscal consolidation than debtors. Beyond its distributive implications for labour and capital, government debt also has distributive effects across generations. As many European societies are ageing, a shrinking labour market population is shouldering a greater economic burden than in previous generations, which has increased the salience of the intergenerational redistributive conflict (Vlandas, 2018). Public debt clearly relates to this conflict. Governments can use debt to finance today’s consumption through tomorrow’s taxation; older generations should then expect to repay a smaller amount of the debt through taxation. Based on self-interest, there should be a negative relationship between age and support for fiscal consolidation.2 Yet research on preferences regarding inflation has shown that pensioners and other groups that receive a fixed income are more sensitive towards inflation if pensions are not automatically inflation-adjusted (Howarth and Rommerskirchen, 2017). Retired people and benefit recipients might be more debt averse than other people, which may obscure the relationship between age and debt aversion. Research has also shown that the macroeconomic priorities of individuals reflect their political ideologies (Alt, 1979; Hibbs, 1987a; Scheve, 2004). As Kalecki (1943, p. 2) famously argued, ‘there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic’. To a large extent, this political opposition is endogenous to conflicting material interests. For example, Hibbs (1977) argued that left-wing and right-wing parties have contrasting preferences regarding unemployment and inflation because their respective constituencies are differently affected by unemployment and inflation. However, the supply of policies by elites, including political parties, also shapes demand. Thus, policy preferences are influenced by partisanship. Although some argue that there has been a ‘neoliberal convergence’ of mainstream parties, there 2 This relationship could be influenced by whether individuals have children. Citizens with children might be less inclined to forego the interests of future generations and consequently, they might be more debt averse than people without children.

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are still differences between the macroeconomic priorities of the left and the right in most European countries (see Chapter 3): while parties on the left are more concerned about unemployment, those of the right are traditionally more concerned about inflation and government debt. Assuming that there is an alignment of popular attitudes and party positions, left-wing voters should be more opposed to fiscal consolidation than right-wing voters.

Country-level factors Many factors that affect the public’s preferences regarding fiscal consolidation may depend on the existing economic conditions and macroeconomic policies. First, the costs of an increase in the deficit and debt rates are influenced by the state of public finances. Countries with high levels of debt have to pay higher borrowing costs than countries with low levels of debt. If voters adjust their preferences according to the costs that the government incurs, public concern over debt should rise as debt increases. This feedback effect may be reinforced by the fear of fiscal consolidations. Countries with higher levels of debt are more likely to lose access to financial markets, which forces them to implement painful austerity policies. Citizens in countries with high levels of debt are more likely to be aware of and fear these socioeconomic costs of government debt. Therefore, there should be a positive link between debt aversion and the government’s deficit and debt, respectively. The prevailing economic climate should also influence debt aversion. In response to economic crises, governments can, in the short run, either use deficit spending or cut spending and raise taxes. Assuming that Keynes was right, the latter has significant economic costs: by decreasing aggregate demand, it leads to lower growth and higher unemployment. If voters adopt a Keynesian perspective, they should recognize this and adjust their debt aversion according to the economic circumstances. In other words, citizens in countries with low growth and a high unemployment rate should be more opposed to fiscal consolidation than citizens in countries with a thriving economy. However, there are strong reasons to believe that, on average, public opinion does not follow a Keynesian logic. Keynesian economic theory relies on complex arguments that are difficult to grasp for policymakers, let alone for the general public. Instead, it is more likely that voters will draw on the personal experience of their household to form their opinion on government debt (Gamble, 2013b). For example, an individual logic of excess borrowing translates into views on public deficits, according to Stanley

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(2014). In the past few years, politicians have often tapped into this sentiment, showing the force of the household analogy.3 We may, therefore, expect that voters will support fiscal consolidation in times of economic crisis, when growth is low and unemployment high. Still, Walter (2016) showed that austerity is easier to implement in some countries than in others due to the national vulnerability profiles of countries, which are structurally determined. In general, countries can choose to pursue external or internal devaluation in the face of a crisis and the paths that countries choose depend on the relative cost of each path. Importantly, monetary integration in Europe strongly influences the relative costs of these paths (Walter et al., 2020). For countries inside the eurozone, external devaluation is extremely difficult because they would have to leave the eurozone to obtain it. Countries within the eurozone, or countries with a fixed exchange rate, are thus more likely to pursue internal devaluation than countries with a floating exchange rate. Given that this internal devaluation comes with significant costs, citizens in these countries may be more debt averse than citizens in countries with a floating exchange rate. Finally, some argue that there are different ‘stability cultures’ in Europe (Dyson, 2000, 2014; Hayo, 1998). The fault line that is commonly identified is one between northern and southern Europe, which was evident in the decades before the creation of the eurozone: while Germany and its neighbours experienced relatively low rates of inflation and stable currencies, southern European countries battled with inflationary pressures and the resulting need for currency depreciation. It is a common assumption that this stability culture goes beyond the elites and is also reflected in public opinion. This should also influence debt aversion, because a central claim behind the stability culture is that high deficits cause inflation. Although inflation remained low in the wake of the global financial crisis in Europe, this argument was still made; i.e. in the ‘debate on the speed and scope of budgetary consolidation efforts, the link between fiscal profligacy and rising inflation has been presented as justification for fiscal consolidation’ (Howarth and Rommerskirchen, 2017, pp. 387–8). Hence, there may be cross-national differences in debt aversion that reflect the existence of divergent stability cultures in Europe.

3 Barnes and Hicks (2022) show that there is a correlation between endorsing the household analogy and opposing government debt, but that this analogy to the household budget does not influence public support for austerity causally.

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Data and methods To study preferences regarding austerity during the European sovereign debt crisis, I use data from the Eurobarometer. The survey is fielded twice a year by the European Commission to gauge trends in public opinion in all member states. Since spring 2010, it has repeatedly asked respondents about their attitudes towards fiscal consolidation. Specifically, respondents are asked to agree or disagree with the statement that ‘measures to reduce the public deficit and debt in (OUR COUNTRY) cannot be delayed’. I use the answers to this question as a dependent variable in my analysis. For this purpose, I first pooled all Eurobarometer surveys from 2010 to 2016, including data from the beginning of the crisis, the height of the storm, and the slow subsequent recovery. I thus study preferences regarding fiscal consolidation across fourteen waves of the survey in all EU member states.⁴ In the pooled data set, I operationalize debt aversion in two different ways by creating two variables called ‘strong’ and ‘weak’ debt aversion, respectively. Strong debt aversion is a binary variable that equals 1 if the respondent strongly agrees with the statement and 0 otherwise (i.e. it includes only fiscal hawks). Weak debt aversion is a binary variable that equals 1 if the respondent strongly or somewhat agrees with the statement (i.e. it includes both fiscal hawks and fiscal conservatives).⁵ My empirical analysis then aims to establish how different independent variables affect support for fiscal consolidation. First, I look at the distribution of debt aversion descriptively, examining trends in the average level of support for fiscal consolidation across all twenty-eight countries over all fourteen waves of the Eurobarometer. Second, I study preferences regarding fiscal policies on the individual level by using the merged file of all fourteen Eurobarometer surveys. In total, there were more than 380,000 respondents, who were asked about their preferences regarding fiscal consolidation between 2010 and 2016, and I use this data to analyse the individual-level correlates of support for fiscal consolidation. For this purpose, I construct a set of additional variables from the Eurobarometer to test my expectations. These variables include a respondent’s education, occupation, labour-market status, age, financial situation, left–right ideology, and house ownership, as well as a range of control variables (e.g. marital status, gender). The exact coding of these variables is shown in Online Appendix B. I then use binary logit ⁴ The countries include Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the UK. ⁵ Online Appendix B reports the summary statistics of the debt-aversion measures.

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regression models to explain variation in the two binary dependent variables that measure debt aversion.⁶ Finally, to test the effect of national-level alongside individual-level factors, I use multilevel analysis with random intercepts. In this analysis, individuals are nested in countries, as debt aversion depends on the economic context in which the question is asked. I then use several cross-level interactions, allowing me to test how the effect of individual-level factors varies across different economic contexts.⁷

Empirical results Differences in debt aversion across time and space In the 2010s, austerity created a significant amount of political discontent across Europe, but the majority of citizens still supported fiscal consolidation, according to the Eurobarometer. Figure 4.1 plots average debt aversion in Europe over time. It shows the average share of respondents in all twentyeight countries, from 2010 to 2016, who agreed or disagreed with the statement that debt reduction could not be delayed. The figure indicates that in the first two years of the crisis, around 85 per cent of respondents agreed that fiscal consolidation could not be delayed. More specifically, according to my definition, more than 50 per cent of respondents were fiscal conservatives in 2010, whereas more than 30 per cent were fiscal hawks. As the sovereign debt crisis in Europe intensified, the share of fiscal hawks increased further and in November 2011, nearly 50 per cent of respondents strongly agreed that fiscal consolidation in their country could not be delayed. At the same time, the share of people who weakly agreed that this was the case dropped to around 40 per cent. This support for fiscal consolidation decreased over time. The share of people who agreed with the need for fiscal consolidation remained constant at around 40 per cent from 2011 onwards, but the share of people who strongly agreed decreased from around 50 per cent in November 2011 to 36 per cent in 2015. Nevertheless, the support for fiscal consolidation remained high even until the end of the crisis: in the autumn of 2015, nearly 80 per cent of citizens still supported fiscal consolidation. ⁶ There are two variables which are not included in all waves of the Eurobarometer: the individuals’ left–right political positioning and whether they own a house. The models used only draw on respondents from seven waves, but the results are robust if all waves are used. The results are also robust to alternative model specifications (e.g. ordinal logistic regressions). ⁷ For the the detailed model specifications, please see Online Appendix B.

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Figure 4.1 Share of respondents by debt aversion Note: The figure shows the share of respondents who agree/disagree with the statement that ‘measures to reduce the public deficit and debt in (OUR COUNTRY) cannot be delayed’. It is based on Eurobarometer surveys from 2010 to 2015. Responses from all countries are pooled.

The (small) decline in support for fiscal consolidation could be explained in various ways. On the one hand, citizens may have become more sceptical of the merits of fiscal consolidation, as they had suffered from the consequences of austerity. As governments had bailed out banks and had been burdened with private debt at the beginning of the crisis, it could have been a negative thermostatic reaction to the crisis management over time. On the other hand, voters may also have reacted to the perceived financial risks in the eurozone. After the European Central Bank promised to do ‘whatever it takes’ to save the euro in July 2012, it became easier for governments to refinance themselves. The threat of another sovereign debt crisis receded and the level of perceived ‘problem pressure’ sank. Individuals may have thus seen less need to reduce government deficits and debt. Yet support for fiscal consolidation remained high over time in most European countries. Figure 4.2a shows that in this regard, there were only small differences between the three geographical regions within the eurozone. At the height of the crisis, there were more fiscal hawks in southern than in northern or eastern Europe, but otherwise, debt aversion was remarkably similar in all three regions. Small differences also existed between countries with different structural positions in the eurozone (Figure 4.2b). In debtor

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Figure 4.2 Share of respondents by debt aversion in different countries Note: The figures show the share of fiscal hawks, fiscal conservatives, and fiscal liberals for different country groups. ‘Fiscal hawks’ are people who ‘totally agree’ with the need to reduce government debt, ‘fiscal conservatives’ are people who ‘tend to agree’, while ‘fiscal liberals’ are all others. Region is defined geographically; the structural position is defined based on whether countries were at the receiving ends of bailouts during the eurozone crisis. Cyprus, Greece, Ireland, Italy, Portugal, and Spain are classified as ‘debtors’; all other countries are classified as ‘creditors’.

countries, which were battling with the sovereign debt crisis, the share of fiscal hawks was higher than elsewhere. This indicates that support for fiscal consolidation may indeed have been influenced by the perceived problem of pressure: in debtor countries, government debt was a particularly salient issue, which also influenced public opinion. At least with respect to public

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opinion, northern Europe does not set itself apart as having a particularly strong stability culture (also see Howarth and Rommerskirchen, 2017). During the economic crisis, support for fiscal consolidation was higher in other regions. This can also be seen when looking at individual countries.⁸ The share of fiscal hawks and fiscal conservatives is high in creditor countries like Germany and Finland as well as debtor countries like Cyprus and Ireland. In contrast, in other countries, debt aversion is significantly lower, but this group again includes both creditor (e.g. the Netherlands and Austria) and debtor countries (e.g. Greece and Spain). There is no clear pattern on the aggregate level and it will, therefore, be useful to dig deeper and to explore how individual-level factors affect debt aversion.

Individual-level correlates To examine the individual-level variables correlated with debt aversion, I use regression analysis. As described earlier, I analyse both strong and weak debt aversion as dependent variables where people with a strong debt aversion are classified as fiscal hawks, while weak debt aversion measures whether they are fiscal hawks or fiscal conservatives. The regression models include common demographic variables like education, occupation, a measure of an individual’s financial situation, and the individual’s evaluation of the national economy as independent variables. To test whether my expectations will be borne out, I also include a measure for house ownership and the left–right positioning of respondents. The results present evidence that debt aversion is correlated with several different variables. First, the financial situation of a household influences debt aversion. Figure 4.3 plots the predicted probability of being debt averse. Generally, people with more financial difficulties are less likely to favour fiscal consolidation than those with none. Citizens who rarely have financial difficulties are the most likely to have both weak and strong debt aversion. Yet there is an interesting pattern: people who sometimes experience financial difficulties are less likely to be fiscal hawks than those who either often or rarely experience them. This indicates that the personal experience of debt may be important in explaining preferences. People who sometimes struggle to pay their bills may experience these situations as particularly daunting; unlike people who continuously face financial difficulties, they are not ⁸ Online Appendix B shows the share of fiscal hawks and fiscal conservatives by country.

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Figure 4.3 Predicted probabilities of debt aversion by financial situation Note: The figures show the predicted probabilities of being strongly (left) or weakly (debt) averse, depending on how often respondents report difficulties paying their bills. The estimates and 95 percent confidence intervals are based on logistic regression models. The full regression table is shown in Online Appendix B.

used to them. This also influences their preferences regarding government debt. The full regression table shown in Online Appendix B supports the notion that better-off people are more likely to be debt averse. Education is usually a good proxy for income, and the results show that there is a positive relationship between education and debt aversion. More educated individuals are less likely to experience unemployment and to rely on social benefits, which are often undermined by austerity. For the same reason, unemployed people, who are vulnerable to austerity policies, are less likely to be fiscal conservatives than employed people. Occupation also has an effect on strong debt aversion, but not on weak debt aversion.⁹ Weak debt aversion is widespread across all classes, but the upper class (the reference group) and unskilled workers are more likely to be strongly debt averse than all other occupational groups. It is striking that these two occupational groups have similar preferences, but this may be the result of equifinality: while the upper class may be more likely to support fiscal consolidation for material reasons, unskilled workers may be more likely to buy into ‘folk’ theories of government debt. This inclination towards debt aversion among different segments ⁹ According to the data, occupation is only weakly correlated with education. Still, even when excluding education from the analysis, the results do not change.

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of the labour market presents an important challenge for parties that want to rally voters to protest against austerity. Second, the regression models also indicate that debt aversion is influenced by asset ownership, as expected. The difference is illustrated in Figure 4.4, which plots the predicted probabilities of being a fiscal hawk and a fiscal conservative, respectively. It shows that people who own a house or apartment that is fully paid for have a 0.82 predicted probability of being a fiscal conservative and a predicted probability of 0.41 of being a fiscal hawk. In contrast, individuals who do not own a house or an apartment have a predicted probability of being a fiscal conservative of 0.77 and a predicted probability of being a fiscal hawk of 0.37. Respondents who own their home but still have to repay their mortgage fall in between these two groups. Although the differences in the predicted probabilities effects are relatively small, given the overwhelming support for fiscal consolidation, they suggest that preferences regarding fiscal consolidation are influenced by people’s positions in the capital market and not just their positions in the labour market. In line with my expectations, age and retirement also affect debt aversion; however, they do so in surprising ways (see Online Appendix B). Retired people are more likely to be fiscal hawks than those in the active working population. In contrast, age has a negative influence on weak debt aversion.

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Figure 4.4 Predicted probabilities of debt aversion by home ownership Note: The figures show the predicted probabilities of being strongly (left) or weakly (debt) averse, depending on whether people own their home outright, own their home but have a mortgage, or do not own their home. The predicted probabilities and their 95 per cent confidence intervals are estimated based on logistic regression models. The full regression table is shown in Online Appendix B.

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All other things being equal, age thus decreases weak debt aversion, but people who rely on pensions are more likely to be debt averse. This shows that government debt taps into the generational conflict. However, the effect of age is, indeed, influenced by the fact that older people are more likely to rely on fixed incomes. This makes them a strong constituency for disinflationary policies like fiscal consolidation. Debt aversion is also influenced by ideology: people on the left of the political spectrum are less averse to debt than people on the right. Figure 4.5 shows that someone who is left-wing has a predicted probability of 0.33 and 0.77 of being a fiscal hawk or a fiscal conservative, respectively. In contrast, someone who is right-wing has a 0.40 and a 0.83 predicted probability of being a fiscal hawk or a fiscal conservative. Again, people in the centre fall in between these two groups. Ideology is thus related to debt aversion, but even respondents who identify as left-wing still have a high predicted probability of being fiscally conservative. This is also shown in Table 4.1, which indicates that the share of left-wing supporters who are fiscal conservatives never dropped below 70 per cent during the period under investigation. There are even a significant number of fiscal hawks among left-wing respondents. In fact, the share of fiscal hawks among left-wing respondents varies between 0.30 and 0.40, suggesting that debt aversion was common across the left–right spectrum during the Great

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Figure 4.5 Predicted probabilities of debt aversion by left–right ideology Note: The figures show the predicted probabilities of being strongly (left) or weakly (debt) averse, depending on their self-reported left–right placement. The predicted probabilities and their 95 per cent confidence intervals are estimated based on logistic regression models. The full regression table is shown in Online Appendix B.

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Attitudes towards Austerity Table 4.1 Debt aversion by ideology

Weak May 2010 Nov 2010 May 2011 May 2014 Nov 2014 May 2015 Nov 2015 May 2016 Nov 2016

0.32 0.34 0.36 0.40 0.36 0.34 0.31 0.30 0.31

Left Strong 0.82 0.83 0.81 0.81 0.80 0.76 0.77 0.70 0.73

Centre Weak Strong

Right Weak Strong

0.33 0.36 0.36 0.43 0.39 0.36 0.35 0.33 0.33

0.37 0.42 0.42 0.48 0.41 0.43 0.39 0.39 0.37

0.84 0.87 0.85 0.86 0.85 0.84 0.84 0.76 0.76

0.86 0.88 0.86 0.86 0.86 0.86 0.85 0.78 0.78

Note: The table shows the share of respondents who are weakly/strongly debt averse by their self-reported left–right placement in different survey waves.

Recession. This probably influenced social democratic parties. They were confronted with a high level of debt aversion among their likely voters. Finally, on top of the subjective evaluation of their personal situation, an individual’s evaluation of the national economy also influences their degree of debt aversion (see Online Appendix B). People with a positive evaluation are less likely to strongly oppose government debt, and are more likely to weakly oppose it. This suggests that an individual’s subjective economic experience influences debt aversion in important ways and that debt aversion may be related to the underlying economic conditions, as argued earlier.

Individual- and country-level correlates To analyse the country-level factors further, I add national-level variables to the regression models. This exercise changes the coefficients for the individual-level determinants only slightly, but it suggests that there are a few important country-level determinants. First, the likelihood that respondents are fiscal conservatives decreases with growth and increases with unemployment (see Online Appendix B). Public opinion thus follows an antiKeynesian intuition; i.e. respondents are more debt averse when growth is low and unemployment is high. Second, the analysis shows that the government’s deficit and debt influence debt aversion. Respondents are more likely to strongly oppose government debt in countries with a larger government deficit (i.e. a negative budget balance), while a high level of government debt decreases debt aversion. In other

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words, individuals are most likely to be debt averse in countries with a high deficit but a low level of government debt. In these countries, fiscal consolidation should be especially salient, given that citizens see a high deficit without being used to high levels of government debt. The results thus indicate that debt aversion follows the economic context in a thermostatic fashion at both the individual and the country level. Yet, subjective evaluations of the predominant economic circumstances differ across individuals. In other words, the economic context might be moderated by an individual’s experience of the economy. To explore whether this is the case, I include interaction effects between ‘hard’ macroeconomic variables and ‘soft’ subjective economic variables in the regressions. The results are shown in Figures 4.6 and 4.7.

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Figure 4.6 Interaction effect of the budget balance and financial situation on the predicted probabilities of debt aversion Note: The figure shows the predicted probabilities of being strongly debt averse, depending on how often respondents report difficulties paying their bills and the government’s budget balance in the country that respondents live in. The predicted probabilities and their 95 per cent confidence intervals are estimated based on logistic regression models. The full regression table is shown in Online Appendix B.

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Positive

Predicted probability

0.45

0.40

0.35

0.30

−2

0

2

4 −2 Growth (t−1), centered

0

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4

Figure 4.7 Interaction effect of economic growth and the subjective evaluation of the economy on the predicted probabilities of debt aversion Note: The figure shows the predicted probabilities of being strongly debt averse, depending on how respondents evaluate the national economy and the actual state of the economy measured by the GDP growth rate. The predicted probabilities and their 95 per cent confidence intervals are estimated based on logistic regression models. The full regression table is shown in Online Appendix B.

Figure 4.6 shows the interaction between the government’s budget balance and a respondent’s financial situation. The graph confirms that there is a negative association between the government’s budget balance and debt aversion, but the strength of this relationship varies across the three groups. For people that sometimes have financial difficulties, debt aversion varies relatively little across the range of the budget’s balance. It varies a lot more for people who often or rarely experience such difficulties. This suggests that an individual’s experience of their household budget also influences preferences for government debt. Figure 4.7 shows the interaction effect between economic growth and an individual’s evaluation of the state of the economy. It shows that growth has a negative effect for individuals that evaluate the state of the economy as bad,

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whereas it has a positive effect for those that evaluate it as good. In other words, debt aversion is lowest among individuals whose evaluation of the economy diverges from the actual macroeconomic situation. Although many citizens adjust their assessment of the economy according to the macroeconomic context, some do not. For these individuals, subjective economic experiences also influence debt aversion.

Conclusion In conclusion, the data from the Eurobarometer shows that a large majority of citizens felt uneasy about their country’s government deficit and debt during the European sovereign debt crisis. The empirical analysis in this chapter tested how different factors affected this public debt aversion. The results are twofold. On the one hand, there is indeed a set of socioeconomic variables that influence debt aversion, even if that influence is often small. Importantly, less well-off people are less concerned about their government’s debt, which results in a positive relationship between income and wealth and debt aversion. On the other hand, debt aversion is also correlated with country-level variables and the macroeconomic context. The results show that the stability culture in northern Europe is a myth (Howarth and Rommerskirchen, 2017), but that citizens systematically adjust their debt aversion according to the existing economic conditions. By and large, voters respond to changes in the economy in an anti-Keynesian fashion: they are more likely to support fiscal consolidation when the economic conditions are bad and the government deficit is large. In this sense, voters seem to equate the public deficit with that of a private household, for which balance is the ultimate aim. This is also evident from the fact that the subjective economic assessment of the economy moderates the influence of macroeconomic variables on debt aversion. An individual’s experience of the economy translates into their views on fiscal consolidation. Despite this variation in fiscal preferences among respondents to the Eurobarometer, it is important to note that, on average, debt aversion was high in Europe in the wake of the global financial crisis. If individual preferences matter for policy outcomes, this could have contributed to the dominance of austerity as a policy in Europe (Bansak et al., 2021). Although respondents on the left were slightly less debt averse than respondents on the right, an overwhelming number of them still expressed fiscal conservative views.

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Chapters 6 and 7 will analyse how social democratic politicians and policymakers in Germany and the UK, respectively, were constrained by this public sentiment, as well as their attempts to resolve the tension between their ideology and their quest for fiscal credibility. Before the book proceeds with the case studies, however, it will be useful to further analyse the demand side, because the high level of debt aversion in Europe during the Great Recession is puzzling. Why do voters support austerity? On the basis of what we have seen up to this point, there could be three explanations. First, government debt became an extremely salient topic in the spring of 2010 when the European sovereign debt crisis began. It was widely debated by politicians, journalists, and economists, who largely argued for austerity. Public opinion followed these arguments (Barnes and Hicks, 2018; Bisgaard and Slothuus, 2018): given the overwhelming support for austerity among elites, government debt also became a taboo among voters. Second, as this chapter has demonstrated, personal experiences of the economy strongly influence preferences for macroeconomic policies. Fiscal conservatism might be widespread among voters because they extrapolate from their own experience of balancing the household budget. They only have an intuitive understanding of debt, which is deeply rooted in ‘folk economics’ (Rubin, 2003). Fiscal consolidation thus becomes a ‘valence issue’ on which most voters share a common position (Stokes, 1963). Put simply, voters do not have a Keynesian understanding of the economy, which makes it very difficult for parties to rally them against austerity. In their quest for economic credibility and competence, social democrats are forced to give up their programmatic ideal positions, as public opinion pushes them towards the right. Third, the evidence shown in this chapter suggests that debt aversion is not absolute. A large share of respondents are fiscal conservatives and support budget consolidation in principle, but they are not necessarily fiscal hawks who think that it should be a priority for their government. This points to an important weakness of the data from the Eurobarometer and many other existing surveys. Although governments can rely on growth to consolidate their finances in the medium or long run, they usually face tough choices in the short run. They can reduce their budget deficit either by cutting

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government spending or by increasing taxes. However, most existing surveys are unidimensional; i.e. they ignore the trade-offs inherent in the design of fiscal policies, and thus they might overstate the citizens’ level of support for fiscal consolidation. Chapter 5 addresses this shortcoming of the existing data by using evidence from two survey experiments conducted in four European countries.

5 Public Opinion Regarding Fiscal Consolidation in the Face of Trade-offs Evidence from Survey Experiments

Introduction Chapter 4 showed that there was a high level of debt aversion among voters across Europe in the wake of the Great Recession.1 As government debt became a taboo, more than 80 per cent of respondents consistently agreed that fiscal consolidation could not be delayed in their countries. This indicates that there was strong electoral pressure for the government to observe fiscal orthodoxy. However, the data from the Eurobarometer suffers from severe shortcomings. The questions on fiscal consolidation were awkwardly phrased and suggestive. Furthermore, they do not account for the potential costs of fiscal consolidation; for example, the Eurobarometer ignores the fact that governments have to make difficult choices when implementing austerity policies. In the short run, they usually have to cut spending or increase taxes to plug the public deficit and reduce debt.2 This is important because existing research has also shown that on average, people support higher government spending and lower taxation. Taken together, these findings are puzzling: voters seem to have conflicting preferences, as they want ‘something for nothing’ (Sears and Citrin, 1982) or ‘more for less’ (Welch, 1985). In the words of the former German finance minister Wolfgang Schäuble (2014): ‘The sum of the wishes is greater than the amount of money available. Always. The majority of people want more

1 This chapter is a modified version of an article co-authored with Reto Bürgisser published in the European Journal of Political Research (Bremer and Bürgisser, 2023a). 2 According to Keynesian theory, governments can actually also decrease public debt by raising spending or cutting taxes if the fiscal multiplier is positive and larger than 1. However, given that there is usually a time lag associated with fiscal policies, such an approach would still increase the government’s debt and deficit in the short run. Immediate fiscal consolidation, therefore, usually involves tough choices. Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0005

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government services, fewer taxes, and no debt. That cannot be achieved at the same time.’3 In reality, governments need to raise taxes or issue debt in exchange for providing public goods. They constantly face trade-offs and have to make compromises between different ideal worlds when they design budgets. The existing literature has mostly ignored these trade-offs, largely because survey data often only includes unidimensional questions (similar to the question from the Eurobarometer used in Chapter 4). These questions do not capture the priorities that citizens have with regard to fiscal policies, and in the presence of salient trade-offs, they risk overestimating support for fiscal consolidation. They beg the question of whether voters still support fiscal consolidation when the trade-offs are fully acknowledged, i.e. whether voters are willing to decrease government spending or increase taxes to reduce public debt. To answer this question, this chapter uses novel data from two survey experiments. The experiments were conducted in four European countries (Germany, Italy, Spain, and the UK) in January 2018 with the aim of accounting for the budgetary trade-offs that governments face. In this chapter, I use these experiments to shift from studying citizens’ policy positions towards studying their policy priorities. Put differently, I analyse to what extent voters are willing to cut government spending or raise taxes to pursue fiscal consolidation. Moreover, I build on the analysis from Chapter 4 and explore how support for fiscal consolidation varies across socioeconomic groups. The results are twofold. First, a split-sample experiment confirms that average support for fiscal consolidation is high in an unconstrained setting, but plummets when respondents are informed about the associated fiscal tradeoffs. Revenue-based consolidation is wildly unpopular, but expenditurebased consolidation is also contested. Second, a conjoint survey experiment reveals that fiscal consolidation is, on average, not a priority for citizens. In a constrained setting, the average citizen does not care much about government debt compared to government spending and taxation. Instead, there is a strong commitment to more progressive taxes to finance government spending. Regular opinion polls consistently overestimate support for fiscal consolidation, which has important consequences for policymakers: as

3 My translation; original: ‘Die Summe der Wünsche ist größer als der Betrag an Geld, das da ist. Immer. Die Mehrheit der Menschen will mehr staatliche Leistungen, weniger Steuern und keine Schulden. Das lässt sich gleichzeitig gar nicht erreichen.’

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voters do indeed prioritize other policies over austerity, (social democratic) politicians should find it easier to oppose austerity than the data used in Chapter 4 suggests. To make these arguments, the remainder of this chapter is structured as follows. First, I briefly review the literature on fiscal policy preferences and trade-offs, highlighting the motivation for the chapter. Second, I develop theoretical expectations about how citizens prioritize different fiscal policies when they are confronted with policy trade-offs. Then I explain the research design in detail before discussing the results of the experiments. The chapter concludes by discussing the strategic implications of its results for social democratic parties.

Public opinion on fiscal policies: do citizens have inconsistent preferences? Chapter 4 showed that support for fiscal consolidation is high in principle. However, the finding that many citizens are fiscal conservatives cannot easily be squared with other research. First, there is a significant amount of empirical evidence that government spending in general, and the welfare state in particular, enjoys widespread support among the public. This omnipresent support for the welfare state has also been used to explain why full-frontal attacks on major welfare state programmes are politically risky (Brooks and Manza, 2007; Pierson, 1996). More recently, the literature on the multidimensional nature of welfare politics has shown that the main issue of conflict does not revolve around more or less spending per se but rather around more fine-grained distributional issues between different types of social spending (Bonoli and Natali, 2012; Häusermann, 2010; Morel et al., 2012). Scholars have started to emphasize differences in voters’ preferences between consumption-oriented and investment-oriented government spending (e.g. Bonoli, 2013; Beramendi et al., 2015; Busemeyer et al., 2020; Häusermann et al., 2022). Yet, notwithstanding these differences, public support is high for both types of social spending and, in general, fiscal retrenchment is unpopular. Second, other research suggests that citizens, on average, also support low taxes. Historically, a large increase in tax revenues occurred in advanced economies in the late nineteenth and early twentieth centuries (Kiser and Karceski, 2017). This increase was largely generated through progressive income taxation, which was used to finance the expansion of

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the welfare state.⁴ Yet, from the 1980s onwards, the new tax doctrine was more concerned with efficiency than equity. Taxes on capital and income were lowered and it is commonly assumed that this reduction in taxes was supported by the public. Today, modal respondents still support low(er) tax levels, even if they may be in favour of more progressive tax systems (Ballard-Rosa et al., 2017; Barnes, 2015). In light of this research, the findings of the existing literature are puzzling: while citizens support the existing levels of government spending, they do not want to pay for it through tax increases or deficit spending. Mueller (1963, pp. 222–3) had already identified this contradiction in 1963. As she aptly put it: [There] is [a] lack of congruence in people’s thinking about fiscal programs. Although there is strong support for the extension of a number of government programs, only a minority of the people …would like to see taxes raised, and hardly anyone would like to see these expenditures financed by deficits.

As a result, academics have identified conflicting preferences among the public (e.g Free and Cantril, 1967; Sears and Citrin, 1982; Welch, 1985). For example, Citrin (1979, p. 113) argued that ‘the public’s readiness to demand and consume government programmes is understandably greater than its willingness to pay for it’, whereas Eismeier (1982, pp. 142–3) found a ‘widening gap between public demands for government spending and public willingness to pay for this spending’. This led Bell (1976, pp. 226–7) to declare that How much the government shall spend, and for whom, obviously is the major political question of the next decades …[but] the pressure to increase services is not necessarily matched by the mechanisms to pay for them, either a rising debt or rising taxes.

These claims are confirmed by evidence from the online survey used in this chapter. Figure 5.1 shows the distribution of preferences regarding government spending, taxes, and public debt. All distributions are clearly skewed towards the left, indicating that the public’s attitudes towards fiscal consolidation are inconsistent: a majority of citizens support higher government ⁴ Scheve and Stasavage (2016) show that the introduction of progressive income taxation was mainly driven by mass military conscription for warfare. It led to demands for taxation of the rich to be introduced so as to distribute the burden of war across society.

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0.0

0.2

0.3 0.2 0.1 0.0 0 1 2 3 4 5 6 7 8 9 10 Support for debt reduction (0−10)

Figure 5.1 Distribution of support for higher government spending, lower taxes, and lower government debt Note: The figure shows the distribution of respondents’ agreement with higher spending, lower taxes, and lower government debt (in the control group only). Respondents were asked to indicate to what extent they agree or disagree with simple statements, e.g. ‘the government should increase spending on pensions’. The scale ranges from 0 to 10 where 0 means ‘strongly disagree’ and 10 means ‘strongly agree’.

spending, lower taxes, and lower debt.⁵ As Wolfgang Schäuble recognized, ⁵ For example, if we count all responses from 6 to 10 as agreement, 88 per cent of citizens support higher spending on education, 63 per cent support a lower rate of income tax (for all citizens), and 73 per cent support lower levels of government debt.

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this creates a dilemma for politicians and political parties, who have to square the circle when they design government budgets. Nicklaus-Thomas Symonds, a British Labour MP, put this as follows: ‘the strange thing about public opinion is that it sometimes gives you contradictory things. There seems to be a desire for high public spending but very low taxes and politicians have to find some alchemy to make those things possible’ (personal interview, 5 November 2016).

Taking trade-offs seriously: from policy positions towards priorities Based on the existing research, one may be inclined to think that voters’ preferences are logically incoherent and fundamentally irrational. Voters as a whole may not really have clear political preferences on complex issues such as fiscal policies: they may be ‘fiscally ignorant’ (Lewis, 1982) and wilfully ignore the trade-offs between different policies, or they could be cognitively overwhelmed, failing to appreciate these trade-offs (Achen and Bartels, 2016). Yet, the empirical foundations of the literature on fiscal consolidation are problematic. First, electoral outcomes are a biased measure of the effect of fiscal consolidation. Governments strategically time fiscal consolidation to minimize electoral punishment. Therefore, the full political effect of retrenchment may not be reflected in electoral outcomes (Hübscher and Sattler, 2017; Hübscher et al., 2021). Second, most research assesses public opinion on individual policies independent of other fiscal policies. It does not capture the multidimensionality of fiscal policies and ignores the fact that governments face difficult trade-offs (Adolph et al., 2020). In challenging economic times, governments cannot rely on growth to shrink the debt burden. Instead, they have to cut spending or increase taxes. Fiscal consolidation thus carries substantial trade-offs, which are not accounted for in traditional surveys. Since governments cannot make decisions about debt in isolation from other policies, this fails to represent the realities of public budgeting. Findings based on electoral outcomes are therefore likely to overstate public support for fiscal consolidation. To measure support for fiscal consolidation, we thus need to move beyond assessing people’s positions on individual fiscal policies and explicitly study their fiscal policy priorities in multidimensional choice settings. Knowing about citizens’ priorities is important for several reasons (see Hanretty et al., 2020). First, relying on unidimensional questions to assess what the public

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wants is not helpful for policymakers. The resulting signals are incoherent since citizens support higher spending, lower taxes, and lower debt at the same time. In contrast, studying priorities provides valuable information to policymakers and scholars alike about which policies citizens deem essential. Second, knowing about priorities helps to better understand political competition and predict the electoral consequences of different fiscal policies. Voters are only likely to react to different fiscal policies if they also care about them. Third, knowing voters’ priorities is important in order to study elite responsiveness to public opinion more carefully. Governments may be equally responsive to all citizens’ policy positions, but they could still give more weight to the priorities of higher- than of lower-income people. Existing work has already made some important contributions to a better understanding of people’s policy priorities. For example, Hockley and Harbour (1983) used a survey in the UK that was designed to reduce the problem of ‘fiscal illusion’. It revealed that voters could make meaningful decisions about how they would allocate a hypothetical budget increment. Similarly, Hansen (1998) showed that when citizens were primed about trade-offs, their opinions about budgetary alternatives became more consistent. Research by Busemeyer and Garritzmann (2017) studied how respondents change their attitudes towards education spending when they are confronted with tradeoffs. Their findings show that increasing education spending is less popular when this comes at the cost of existing social policies or is accompanied by higher taxes or higher government debt. In turn, Barnes et al. (2022) show that British citizens favour paying higher taxes to finance large spending increases in important budget categories when they are confronted with deficit-neutral policy packages. Based on this evidence, I expect that citizens will adjust their support for change for fiscal consolidation when they are confronted with trade-offs. In principle, support for lower government debt is high among the public (see Chapter 4), as is support for lower taxes and higher spending. Yet there are reasons to believe that reducing government debt is not a priority for most citizens. Public debt is very abstract and its impact on citizens is less direct than that of taxes (which they pay regularly) or spending on public benefits or services (which many receive/use constantly). Existing forms of government spending create strong electoral constituencies who are reluctant to accept retrenchment (Pierson, 1996). For example, pensions are the most popular form of social spending in advanced welfare states, because many people are retired or expect to retire. Similarly, higher taxes are unpopular because they

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reduce the disposable income of almost all citizens; this is especially true of consumption taxes (VAT) and income taxes. Therefore, compared to other dimensions of fiscal policy, government debt carries few costs or benefits for citizens. When countries face a sovereign debt crisis, the costs of debt increase as citizens feel adverse economic consequences. However, in all other circumstances, government debt has little impact on the average citizen and their disposable income. In theory, debt can be seen as a form of future taxation and, according to the Ricardian equivalence theorem, rational and forward-looking individuals should thus internalize changes in public debt and adjust their behaviour accordingly. However, we know from the literature on intertemporal tradeoffs that citizens are myopic (Jacobs, 2011, 2016; Jacobs and Matthews, 2012). When voters evaluate government policy programmes, they give less weight to long-term policy consequences than to those that will emerge in the short term. Thus, it is reasonable to assume that budgetary decisions that affect current costs and benefits have a more considerable impact on citizens’ priorities than budgetary decisions affecting future costs and benefits. Therefore, I assume that government debt is not a priority for the average citizen. Most people care more about protecting their benefits (from government spending) or reducing their costs (from taxation) than lowering government debt. By this, I do not mean to say that people do not care at all about public debt. As shown earlier, in fact they do seem to support fiscal consolidation when asked about that issue in isolation. Given the abstract nature of public debt and the uncertainty of how public debt impacts citizens’ future costs, however, I assume that citizens will prioritize lower taxation and higher government spending over lower public debt. On average, support for fiscal consolidation should decline substantially when the necessary spending and tax trade-offs are explicitly acknowledged. In fact, one can assume that voters prioritize certain types of fiscal consolidation over others. For instance, taxes affect most citizens’ disposable income more directly than government spending. A sizeable share of public spending does not directly flow into people’s pockets: infrastructure, education, and even healthcare spending influence the median voter’s disposable income indirectly, and often only in the future. In contrast, tax increases affect the median voter’s budget much more directly: they immediately experience a drop in their disposable income. It seems likely that people should care more about the costs of taxation than the benefits of government spending and, therefore, be more opposed to revenue-based than expenditure-based consolidation. Overall, this implies the following fiscal policy priorities for

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the average citizen: taxation should be the highest priority, followed by government spending and then by government debt. Although citizens support lower debt in principle, this has a lower priority for them than reducing taxes and increasing government spending.

Research design The existing surveys do not allow me to study fiscal policy priorities because they primarily pose unidimensional questions. As Jacoby (1994, p. 338) once put it, ‘the underlying structures [of public opinion] …cannot be discerned from responses to a single survey item’. To overcome this limitation of the existing research, we must instead examine preferences across separate fiscal policies at the same time. To this end, I use a novel survey that was fielded in 2018 in four large European countries: Germany, Italy, Spain, and the UK. The countries were selected to represent major European economies with advanced welfare states, featuring different variants of capitalism (Hall and Soskice, 2001) and of growth models (Baccaro and Pontusson, 2016). In each country, 1200 respondents were recruited to participate in the survey from a large online panel provided by Qualtrics. Respondents were drawn from a pool of eligible voters in each country, and quota sampling was used to make the sample representative of all eligible voters based on gender and age.⁶ The survey included two experiments designed to overcome the problems associated with conventional surveys while making modest cognitive demands upon respondents. First, I use a split experiment to measure support for fiscal consolidation when this comes at the cost of either lower spending (spending-based consolidation) or higher taxes (revenue-based consolidation). Second, I use a conjoint survey experiment that asks respondents to evaluate different fiscal policy packages, aiming to elicit budgetary priorities in a multidimensional setting.⁷ Both experiments explicitly test whether citizens care about government debt instead of implicitly assuming that they do. Following the existing literature (e.g Hansen, 1998; Sanders, 1988), the experiments assume that people do not need to know a lot about government budgets to evaluate different ⁶ Survey weights based on entropy balancing were also used to further match the population’s demographic margins in each country as closely as possible. The results do not change if these weights are used. ⁷ To avoid treatment effects, the split-sample experiment occurred after the conjoint experiment in the survey.

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alternatives. As governments usually decide on their budgets annually, budgetary debates are a regular feature of the political debate that is familiar to many citizens. Thus, citizens only need to know the rough outline of a policy to evaluate it; all the more so as they have a large amount of information at their disposal to help them decide. The media covers budgetary debates extensively, and political parties act as mediators. They develop and formulate different policy positions, which they continuously communicate to voters.

Part 1: experiment with split-sample questions The first survey experiment tests how individuals change their attitudes towards fiscal consolidation when they are confronted with two-dimensional trade-offs. Following Busemeyer and Garritzmann (2017), respondents were randomly assigned to four different groups, including one control group and three different treatment groups. Respondents in the treatment groups were presented with different statements that raised awareness of budgetary tradeoffs: spending-based fiscal consolidation (treatment 1), revenue-based fiscal consolidation (treatment 2), and an ambiguous treatment that raises the possibility of either spending cuts or tax increases (treatment 3). The control group was presented with a statement that did not allude to any kind of tradeoff. Subsequently, respondents were asked to evaluate to what extent they agreed or disagreed with these different statements. Table 5.1 shows the full statements that were used for the different groups. To analyse whether support for fiscal consolidation varies across the four treatment groups, I first graphically present the predicted mean support for fiscal consolidation for the control group and the three treatment groups based on OLS regression. As a robustness test, I also control for several covariates (e.g. age, sex, marital status, education, income, employment Table 5.1 Design of the split experiment Split

Treatment

Question

1 2

Control group Treatment 1

3

Treatment 2

4

Treatment 3

The government should reduce the level of government debt. The government should reduce the level of government debt, even if that implies lower government spending. The government should reduce the level of government debt, even if that implies higher taxes. The government should reduce the level of government debt, even if that implies lower government spending or higher taxes.

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status, union membership, and partisanship). To assess whether there are differences across countries and electoral constituencies, I plot the results by income, partisanship, and country. Moreover, I use multivariate regression analysis to identify individual-level characteristics that correlate with peoples’ support for different forms of government spending, depending on which trade-offs they were presented with.

Part 2: conjoint survey experiment Before confronting respondents with the questions detailed in Part 1, the survey also included a conjoint survey experiment to study attitudes towards fiscal policies in a multidimensional setting. Conjoint surveys have been widely used in product analysis for a long time to measure how people value different attributes of a product or service. Recently, conjoint experiments have also become popular in social science (Hainmueller et al., 2014) and they are increasingly used in comparative political economy to capture the importance of trade-offs (e.g. Bremer and Bürgisser, 2023b; Gallego and Marx, 2017; Häusermann et al., 2019). Conjoint survey experiments are useful for this purpose because they require respondents to evaluate entire policy packages rather than individual measures. I apply this method to the study of fiscal policies. Specifically, in the survey, respondents had to evaluate changes to the government budget in a set of choice tasks. Each task presented them with two profiles of possible budgetary changes, asking them (i) to choose between two different fiscal packages (choice variable) and (ii) to indicate how likely they were to support each of the packages (rating variable). The profiles comprised six attributes corresponding to particular elements of a government budget and each attribute could take on a set of discrete and predefined levels, representing different policy options. The profiles were then generated randomly; i.e. they contained a fixed number of attributes, which were shown to respondents in random order and with a random display of attribute levels.⁸ As shown in Table 5.2, the fiscal packages contained six attributes that were chosen to represent the three dimensions that are salient for government budgets: spending, taxation, and government debt. With regard to spending, the profiles include two categories in order to distinguish between attitudes towards investment and those towards consumption spending: education was used as a proxy for investment spending, while pension expenditure was used ⁸ The instructions for the conjoint experiment and an example of the task that respondents had to complete are shown in Online Appendix C.

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Table 5.2 Attributes and levels of the conjoint experiment

Spending

Attribute

Attribute levels

Old-age pensions

Increase spending No change Decrease spending Increase spending No change Decrease spending Decrease No change Increase Decrease No change Increase Decrease No change Increase Decrease No change Increase

Education

Taxation

Income tax (for all citizens)

Top income tax

Value-added tax (VAT)

Debt

Government debt

as a proxy for consumption spending. With regard to taxation, the profiles distinguish between three different characteristics that influence the amount of taxes that citizens pay: the level of income taxes, the progressivity of income taxes, and the level of indirect taxes. Finally, debt was also included as a separate attribute, given that governments can raise spending or lower taxes by borrowing.⁹ For each attribute, there are three levels, which allows me to test attitudes towards different combinations of policies. In a fully randomized setting, there would be a total of 729 combinations. However, in reality, taxes and debt are used to pay for government spending. For example, when government spending increases while taxation decreases in a given profile, government debt cannot decrease or stay the same. To represent the budgetary process accurately, restrictions were used to avoid illogical combinations. The design only allowed combinations in which every increase in expenditure or decrease in revenues was matched by a simultaneous decrease

⁹ The number of attributes and levels had to be limited to reduce complexity and avoid cognitive exhaustion. Thus, the experiment only includes the major spending and taxation items that directly influence citizens’ disposable incomes. Respondents are more likely to have clear preferences regarding these issues than preferences regarding other spending items (e.g. defence) or taxation (e.g. corporate tax).

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in expenditure or increase in revenues. As a result, 588 combinations were excluded, leaving 141 possible combinations.1⁰ I calculate two main variables of interest from the conjoint experiment. First, I identify the causal effect of individual attribute levels on the support for the entire fiscal package, compared to the baseline attribute level (Hainmueller et al., 2014). To this end, I estimate the average marginal component effect (AMCE) of a change in the value of one dimension on the probability that the respondent chooses the fiscal package. I obtain the AMCE by regressing the dependent variable on dummy variables for each of the levels (where the status quo is the baseline for each dummy). The AMCE’s desirable property is that it incorporates both the position and the importance that individuals assign to each attribute level (Bansak et al., 2022) and, therefore, captures what I conceptually understand as policy priorities. Second, I follow the recommendations by Leeper et al. (2020) and calculate the conditional marginal means for all attribute levels, which measure how favourably disposed respondents are to a given feature of the fiscal packages. This allows me to analyse differences across subgroups in an exploratory fashion based on a few selected variables (country, income, class, and partisanship). To estimate the AMCEs and marginal means, I use ridge regression. Standard conjoint experiments have dimensions that are independent and fully randomized. Budgetary trade-offs are not independent by design: changing expenditures or revenues on one attribute requires a change in another attribute. The experimental design was informed by this target distribution of the profiles I wanted to make inferences about, namely realistic budgetary combinations. Each attribute value depends on the other attributes’ values in order to ensure that the budget is fully balanced. To account for these dependencies, I use ridge regression to obtain the regression coefficient. Ridge regression is a standard regularization method that Hoerl and Kennard (1970) proposed to address design-based super-collinearity and that Horiuchi et al. (2018) also used for conjoint analysis. To calculate non-parametric confidence intervals, I rely on bootstrapping. This approach allows us to make inferences about the effect of an attribute changing from one value to another, averaging over the randomization distribution of the 141 profiles. I explain the method and rationale further in Online Appendix C. Several robustness

1⁰ Importantly, the likelihood that a given level would appear in combination with another level was still the same as if there were no restrictions, because logical inconsistencies were uniformly deleted. This crucial feature of our design stems from the fact that each attribute includes three symmetrical levels across all attributes (increase, decrease, no change). Each package is randomly created within this subset of consistent fiscal packages and has the same likelihood of occurring.

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tests, also discussed in Online Appendix C, were carried out and did not change the results.

Measuring attitudes towards fiscal consolidation with trade-offs Attitudes towards two-dimensional fiscal policy trade-offs The survey confirms that a majority of voters in Europe are fiscal conservatives and in principle agree that the government should reduce government debt in the unconstrained setting. This is shown in Figure 5.2, where the distribution of preferences regarding fiscal consolidation for the control group is strongly skewed towards the left. Yet the distribution of responses to the question of whether individuals support higher government spending and lower taxes/government debt changes dramatically when respondents are alerted to trade-offs. For all three treatment groups, the distribution of respondents becomes more normally distributed, indicating that, on average,

Lower spending 0.4

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0

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Lower spending/higher taxes

0.4 Proportion

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Higher taxes

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support for fiscal consolidation is much lower when respondents are primed about its possible consequences. To estimate the impact of the treatments and to highlight the importance of trade-offs, the left panel of Figure 5.3 shows the mean support and 95 per cent confidence intervals for fiscal consolidation in an unconstrained setting (control group) as well as with the three different trade-offs (treatment groups). The results clearly show that support for fiscal consolidation drops significantly for the treatment groups. In fact, the magnitude of the differences in the mean between the four groups is striking. The average support for lower government debt without trade-offs is 7.2, but this drops to 5.6 when it comes at the cost of lower government spending. Fiscal consolidation that leads to higher taxes is even more unpopular, as average support for fiscal consolidation drops below 5 and becomes a minority position. Fiscal consolidation that has ambiguous consequences (i.e. lower spending or higher taxes) is similarly unpopular and the results are robust to the inclusion of covariates and country-fixed effects. To analyse support for fiscal consolidation further, I dichotomize the dependent variable and calculate the share of people who support lowering government debt across the four experimental groups. Since I am interested in support for fiscal consolidation, I use 5 as the cut-off point; i.e. responses from 6 to 10 are counted as agreement, while responses from 0 to 5 are counted as disagreement/neutral. The right panel of Figure 5.3 shows that

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a clear majority of 73 per cent of respondents support consolidation in the control group. Support for revenue-based consolidation is a minority position (33 per cent support), while support for expenditure-based fiscal policy is contested (50 per cent support). When the trade-off is ambiguous, 37 per cent of respondents support fiscal consolidation. To test whether there are differences across income or partisanship, Figure 5.4 shows the effect of the treatments for different groups. The lefthand side of Figure 5.4 indicates that differences across income groups are particularly small. In the control group, low-income citizens are slightly less likely to support fiscal consolidation than high-income citizens. Differences across income groups remain small even when trade-offs are introduced; i.e. trade-offs reduce fiscal consolidation support across all income groups. Interestingly, fiscal consolidation support remains the highest among highincome respondents even if it implies higher taxes. The right-hand side of Figure 5.4 shows that there are more substantial differences between the left- and right-wing respondents. There is a lower proportion of fiscal conservatives among left-wing than right-wing citizens (68 compared to 78 per cent) in the unconstrained setting. In addition, voters from the left also dislike fiscal consolidation at the cost of spending cuts and tax increases substantially more than voters from the right. These differences are most pronounced for fiscal consolidation with ambiguous consequences. Overall, the results show that there is some variation in preferences, but this

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variation is much smaller than the differences between the group averages. Left-wing respondents, however, are generally less likely to support fiscal consolidation that comes with trade-offs than right-wing respondents, and I will take up this finding in Chapter 8. Figure 5.5 tests whether support for fiscal consolidation varies by country. The graph indicates that respondents in southern Europe, where government debt is the highest, are more fiscally conservative in the unconstrained setting than those in Germany or the UK. In Italy and Spain, however, the average support drops more than in the other two countries and, therefore, the cross-national variation is smaller in the treatment groups. There are only two outliers: support for fiscal consolidation that leads to a reduction in government spending is somewhat lower in Spain than in the other three countries, while support for fiscal consolidation that comes at the cost of higher taxes is slightly more popular in the UK than in continental Europe. The former could be related to the severity of the eurozone crisis in Spain, which resulted in a general increase in support for direct public transfers, making expenditure-based consolidation a clear minority position. The latter could be due to the generally lower tax levels in the UK, where citizens give governments more leeway to increase taxation. Following Chapter 4, I further use OLS regression models to examine the individual-level characteristics that correlate with respondents’ debt aversion depending on which trade-off scenario was presented to them. I use support for the four different statements as the dependent variable, which I regress on a number of independent variables (e.g. age, sex, income level,

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education, employment status, partisanship, and preferences for redistribution). I include country-fixed effects in the models to account for unobserved heterogeneity across countries. The results are shown in Online Appendix C. They largely confirm findings from Chapter 4. Partisanship, income, and wealth influence preferences for fiscal consolidation and have the expected effects. However, the effect of three attitudinal and political variables are worth highlighting because they give some insights about possible mechanisms.11 First, support for both social insurance and social investment is positively correlated with debt aversion in the control group, which indicates that voters who support these forms of government spending have internalized the ‘progressive consolidation thesis’ (Haffert and Mehrtens, 2015). They are concerned about government debt because it threatens to undermine the ability of governments to provide the benefits and services associated with these policies. Second, political interest is also negatively associated with debt aversion in the control group, but there is no such effect in the treatment groups. This indicates that people with a high amount of political interest may already take into account the costs of fiscal consolidation, even without being explicitly primed about them. Third, trust in the government has no effect in the control group, but it does have a strong effect on support for fiscal consolidation in all three treatment groups. This suggests that support for fiscal consolidation is conditional if it comes at a cost: people who trust the government may have more faith in its ability to cut spending or raise taxes without negative social consequences and hence they are more likely to support fiscal consolidation. In summary, the results suggest that support for fiscal consolidation decreases significantly when salient trade-offs are introduced. It even becomes a minority position for some trade-offs, which suggests that the existing literature has significantly overstated support for fiscal consolidation. Revenue-based consolidation is particularly unpopular, but expenditure-based consolidation is also resisted. Still, the results presented in this section also have shortcomings: they only measure the effect of twodimensional trade-offs. In reality, governments use a variety of different policy levers at the same time to achieve their preferred outcome. To tease out the preferences and priorities of citizens fully, we need to study them in a multidimensional setting. 11 They are robust to several different specifications, including binary logistic regression analysis, ordinal logistic regression analysis, and country-clustered standard errors.

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Attitudes towards multidimensional fiscal policy trade-offs To study trade-offs in a multidimensional setting, I use the conjoint survey experiment. The benefit of this research design is that it allows me to study how public opinion changes when policies vary on several dimensions simultaneously. This is particularly true for the ‘forced-choice’ outcome in which respondents have to compare and choose between two fiscal packages: they have to make difficult trade-offs across all six dimensions. The results from the experiment are shown in Figure 5.6. For each attribute, the plot shows the AMCEs of increasing or decreasing spending, taxes, and government debt relative to the baseline (‘no change’) on the probability that a given package of policies is supported. The AMCEs can be interpreted as the change in the probability that a package will win support when it includes the listed attribute value instead of the baseline attribute value. Given that respondents have to make difficult choices when completing the exercise, Figure 5.6 essentially shows the average citizen’s priorities. In line with the previous findings, it shows that lower government debt is not

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a priority. The effect is close to 0 and this effect holds across several robustness tests. Increasing government debt reduces the likelihood that individuals support a given fiscal package, but this effect is small (1.7 percentage points relative to the baseline). This is also confirmed by the marginal means: on average, the respondents’ probability of choosing a fiscal package is 0.50 with a debt decrease, 0.49 with a debt increase, and 0.51 with no debt change. In contrast, other policies have larger effects, as the average citizen is opposed to an increase in taxation or a decrease in government spending. Respondents strongly dislike increases in general income tax and VAT. The former reduces support by 6.8 percentage points, while the latter lowers it by 6.4 percentage points. Similarly, lower pension and education spending also sharply reduce support for a given fiscal package: lower pension spending reduces the probability that respondents will choose a fiscal package by 6.4 percentage points, while lower education spending reduces the probability by 5.0 percentage points. In line with the split-sample experiment, the effects of spending cuts are smaller than the effects of general tax increases. Respondents are firmly against both forms of fiscal consolidation in a multidimensional setting, but they do seem more opposed to revenue-based than expenditure-based consolidation. Increasing government spending and reducing taxation are less popular policies than commonly thought. Increasing pension and education spending still has a small effect on support for the overall package: the former increases support by 3.1 percentage points, while the latter increases support by 2.1 percentage points. Surprisingly, decreasing income tax or VAT has no negative effect at all, indicating that respondents do not support ever lower taxes. At the same time, the results confirm findings from other research that voters strongly support progressive taxes: raising top income tax increases support for the overall package by 11.3 per cent, while reducing top income tax lowers the probability that respondents will support the package by 11.1 per cent (compared to the status quo). While revenue-based consolidation is generally very unpopular, higher top income taxes are a clear priority for the average respondent. They are a more popular way to raise revenues than either increasing taxes on everyone or increasing government debt. To verify that public debt is not a priority, I exclusively assess the importance respondents assign to this attribute. In addition to the choice task, respondents were asked to rate each fiscal package on an eleven-point Likert scale from 0 to 10. This allows me to plot the distribution of the ratings of all conjoint packages by the attribute levels for government debt in Figure 5.7.

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The results clearly show that citizens do not attach a high priority to government debt. There are barely any differences visible in how respondents rated fiscal packages depending on whether public debt stayed the same, increased, or decreased. Moreover, the distribution shows that debt is not a contested issue whereby many respondents strongly dislike and many strongly support debt. Even at the extreme ends of the distribution, there are hardly any differences in support between the different attribute levels for government debt. Overall, the results, therefore, suggest that government debt is essentially irrelevant in terms of respondents’ evaluation of the packages presented to them. Decreasing government debt is not a priority for citizens, who care more about protecting the benefits that they receive from government spending without having to pay additional taxes for them. Instead, it is a high priority for the average respondent to increase top income tax rates to finance additional spending. Aggregate fiscal policy priorities, however, may hide heterogeneity in effects. Conjoint analysis does not allow me to test this explicitly because respondents were not shown all of the possible budgetary proposals due to the

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relatively high number of combinations. To test whether the priority ordering identified earlier is stable across respondents, however, I use subgroup analyses. As I did previously, I consider differences across three dimensions: income, partisanship, and country. The most striking aspect of Figures 5.8 and 5.9 is that there are only very small differences across the subgroups. The direction of the effects does not vary at all, while the magnitude of these effects also remains remarkably similar. First, Figure 5.8 shows that government debt is not a priority for any income group, but there are some differences concerning spending cuts

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and tax increases. Education spending is more important for high-income citizens, while pension spending is more important for medium-income respondents. Medium-income citizens are somewhat more supportive of increasing general income taxes and top income taxes than respondents from the other tertiles. Although this is evidence that material interest influences how citizens respond to spending cuts and tax increases, the differences are relatively small.12 In line with previous findings, Figure 5.8 shows that right-wing citizens are slightly more debt averse than left-wing citizens. Right-wing respondents are less likely to support packages that increase debt than left-wing respondents. They are not more likely to support packages that decrease debt, but they are more supportive of the status quo than people on the left. Differences across electoral constituencies are more pronounced for the other two dimensions. First, left-wing respondents are more likely to prioritize education, and this popularity of education spending for the left could explain why left-wing voters react more strongly to spending-based consolidation in the split-sample experiment. Second, left-wing respondents more strongly favour an increase in the top rate of income tax, but it is striking that right-wing respondents also respond positively. If trade-offs are binding, a broad political coalition of citizens prefers to raise taxes on the rich rather than cut spending or increase other taxes or debt. Support for pension spending and other forms of taxation are roughly similar for both groups.13 Figure 5.9 shows that the general pattern found above also holds across the four countries, though there are some small differences. German and British respondents attach a slightly higher priority to education and pension spending than their Italian and Spanish counterparts. Moreover, respondents in Italy and Spain react more sensitively to government debt. This confirms findings from the split-survey experiment that fiscal consolidation is supported slightly more in the countries with the highest level of government debt, indicating that there are feedback effects: in countries with a higher level of public debt (Italy and Spain), citizens presumably perceive it to be a larger risk. They have recently experienced the negative costs of a sovereign debt crisis, and, therefore, the costs of debt are more apparent. This also supports the conclusion from Chapter 4 that the alleged stability culture in Northern Europe is a myth, as voters in Germany do not prioritize reducing government debt more than voters in other countries do. 12 Even high-income respondents favour an increase in the top rate of income tax. Either they are altruistic or they assume that they would not pay that rate. 13 There are barely any differences in support concerning other individual-level variables (e.g. occupation, wealth, left–right placement, party family).

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Conclusion In conclusion, this chapter has presented evidence that citizens change their preferences regarding fiscal policies when they are confronted with trade-offs. In fact, the inconsistent policy preferences that many scholars have identified among the public vanish when one accounts for the multidimensionality of fiscal policies. According to the split-sample experiment, support for fiscal consolidation policies drops significantly when individuals are confronted with the different possible trade-offs that these policies might have. On average, citizens are particularly opposed to revenue-based consolidation, but spending-based consolidation is also unpopular. Respondents from the left, however, who are more attached to the benefits and services that the state provides, react more negatively to spending-based consolidation than respondents from the right. The conjoint survey experiment confirmed the finding that voters do not care as much about debt as they care about government spending and taxation. It examined how respondents prioritize different policies when they are forced to consider fiscal policy trade-offs on several dimensions simultaneously. The results indicate that the public has clear priorities. On average, people favour neither lowering government debt nor lower taxes; instead, they support a more progressive tax system to pay for higher government spending. Support for fiscal consolidation, in other words, is not as strong as the data from Chapter 4 suggests. This is particularly true for respondents from the left, who are less opposed to a higher level of debt than respondents from the right. Overall, this chapter suggests that support for fiscal consolidation is not as high as unidimensional survey questions might indicate. Although a majority of people agree that fiscal consolidation is important in principle, respondents care less about reducing government debt when the trade-offs are fully acknowledged. This finding may help us to make sense of the political turmoil in Europe in the wake of the Great Recession. As austerity became the

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predominant response to the economic crisis, political actors prioritized a policy—lowering government debt—that the public apparently cared very little about. As a result, austerity may be more costly for governments that implement it than some observational studies have suggested. Chapter 8 will take up this finding and analyse the electoral consequences of implementing austerity for social democratic parties. It will test to what extent austerity contributed to the electoral crisis that social democratic parties experienced in the context of the Great Recession. However, for the purposes of this book, the analyses presented in this chapter are an important complement to Chapter 4. In theory, the fact that government debt is not a priority for citizens makes the electoral pressures for fiscal consolidation that Chapter 4 identified less binding. If parties from the left manage to convince voters that fiscal consolidation is costly, they may be able to find sufficient support for mobilizing against austerity. Chapters 6 and 7 will turn to the question of why social democratic parties did not do this during the Great Recession. They will show how electoral-strategic considerations were combined with ideational arguments that pushed the British Labour Party and the German SPD towards austerity. To briefly foreshadow the results, the analysis suggests that parties had a flawed conception of public opinion, failing to grasp how contested austerity policies would be. Moreover, they drew on a specific set of economic ideas that legitimized fiscal consolidation within social democratic parties, which made it unlikely for them to contest Europe’s austerity settlement. Like voters, they did not fully consider the negative consequences that austerity policies would have. The conclusion, Chapter 9, will take up the findings from this chapter as well as those of Chapter 8, arguing that accepting austerity was the wrong political choice for the centre-left.

6 The Fiscal Policies of the British Labour Party in Times of Crisis Where Have All the Keynesians Gone?

Introduction In the UK, the Labour Party’s response to the Great Recession felt like a rollercoaster ride. In the immediate aftermath of the financial crisis, the Labour government under Gordon Brown recapitalized the banks and implemented a Keynesian stimulus programme to reflate the economy. As a result, the government’s budget deficit increased to nearly 10 per cent of GDP in 2009, and ahead of the 2010 election, Labour reversed course. It proposed a deficit reduction plan including cuts that, as Chancellor Alistair Darling stated in a BBC interview, would be ‘deeper and tougher’ than Margaret Thatcher’s cuts in the 1980s. Labour nonetheless lost the election in 2010 and found itself in opposition, while the new coalition government, led by the Conservatives and the Liberal Democrats (often referred to as the ‘Lib Dems’), implemented austerity. In the beginning, Labour criticized this programme on Keynesian grounds, but over the electoral cycle, the party shifted back towards fiscal conservatism. Eventually, it would include a triple budget responsibility lock on the first page of its manifesto for the 2015 election. In this chapter, I analyse this puzzling rollercoaster ride. To this end, the chapter combines a quantitative content analysis of election campaigns from before and after the financial crisis with a qualitative case study. The quantitative content analysis shows that while Labour remained wedded to centrist fiscal policies in its response to the crisis, it attempted to shift its position on welfare and economic liberalism. This resulted in an inconsistent economic programme that combined policies in a piecemeal fashion. The qualitative case study uses ‘explaining outcome process tracing’ (Beach and Pedersen, 2013) in an attempt to explain this response. Based on the case study’s twenty interviews with Labour politicians and policymakers and the evidence of additional primary and secondary sources, the chapter then argues that both Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0006

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electoral-strategic calculations and lingering economic ideas from the Third Way programme shaped Labour’s strategy. In the wake of the financial crisis, leaders like Gordon Brown, Ed Miliband, Alistair Darling, and Ed Balls initially implemented a strategy that took Keynes’ insights seriously: they saved the financial system and implemented a large stimulus programme. However, when the government’s deficit came close to reaching double digits, the public discourse became increasingly concerned with the sustainability of government debt. Warnings by the Conservatives and many figures in the UK establishment about the deficit resonated with voters (see Chapter 4). They used rhetorical devices rooted in common sense, which turned government debt into a taboo. In this context, the Labour Party was preoccupied with the perceived need to close its ‘credibility gap’ with the Conservatives, both before and after the 2010 election. This undermined any initiatives within the Labour Party to promote an anti-austerity programme. Influenced by the conservatism of the economic debate in the UK, the party tried to take a page from New Labour’s playbook by reassuring voters that it could be trusted with the public finances. It sacrificed Keynesian demand stimulus on the altar of economic credibility, but this strategy was also legitimized by ideas based on supply-side Keynesianism. These ideas had become dominant within the Labour Party as part of the Third Way and they were still a strong influence on the party’s leadership during the Great Recession. They prescribed a smaller role for fiscal policy than conventional Keynesianism had done, which helped to push Labour towards fiscal orthodoxy. To make this argument, the chapter proceeds in five steps. First, I briefly review the economic policies that Labour has espoused since 1945. This analysis will necessarily remain incomplete, but it is important in order to contextualize the policies that Labour adopted in response to the economic crisis. Second, I use the data set from Chapter 3 to analyse the Labour Party’s response to the economic crisis. Then, and third, I attempt to explain this response by way of process tracing. This analysis distinguishes four different periods in Labour’s response to the Great Recession and pays close attention to the nature and timings of policy shifts. It shows how electoral-strategic considerations were combined with economic arguments to justify fiscal orthodoxy. Fourth, I consider the legacy of the Third Way, which Labour had embarked upon before the crisis. I argue that there was an element of path dependency due to feedback effects, which constrained the Labour Party in the context of the Great Recession. Finally, I conclude by discussing the implications of this chapter for Labour’s trajectory since 2015, especially the rise and fall of Corbynism.

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Labour’s economic policies before the Great Recession The Labour Party had a complicated relationship with economic policies in the twentieth century, and particularly with fiscal policies. Labour’s policies in the post-war period fall into three broad phrases. I refer to these periods under the following three headings: ‘The Reign of Keynesianism: 1945-1979’, ‘In the Shadow of Monetarism: 1979-1997’, and ‘New Labour’s Symbiosis: 1997-2008’.

The reign of Keynesianism: 1945–79 Just after the end of the Second World War, Clement Attlee won a resounding election victory in 1945. He faced a Herculean task: rebuilding the economy and developing a welfare state while the UK government was virtually bankrupt. The Labour government lived up to that task and built the welfare state from the ashes of the war, largely by following the recommendations of the Beveridge Report of 1942, which had proposed widespread reforms to address the UK’s most pressing social problems. Based on the 1944 White Paper on Employment Policy, the government made full employment its primary aim. This marked the beginning of the British post-war Keynesian consensus. For the next thirty years, Labour and the Conservative Party agreed that governments should use macroeconomic policies to maintain a high and stable level of employment. Following Keynes, there was a general expectation that the state should not allow deep recessions and high levels of unemployment to persist. Instead, governments used fiscal policies to fine-tune the economy, creating the financial confidence that would enable long-term investment (Jones, 2014). Although Keynesianism evolved in response to new economic challenges (Hall, 1986), governments generally accepted that fiscal policy should be focused on stabilizing the economy during the post-war era. This Keynesian consensus was only challenged by new economic developments in the 1970s. Following the end of the Bretton Woods system and repeated oil shocks, ‘stagflation’ shed doubt on Keynesianism. It questioned the Phillips curve, which described a historical inverse relationship between unemployment and inflation, and in combination with recurring balance of payment problems, it created problems that Keynesian economists could not easily make sense of.1 1 The Phillips curve was named after the Keynesian economist William Phillips, who showed that this relationship existed empirically. Based on it, different UK governments had sought to reach an acceptable point on the Phillips curve by trading off a certain amount of inflation for lower unemployment (Hall, 1986).

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The Conservative government under Edward Heath initially adopted a muddled response to the recurring crises. Before the 1970 election, Heath had endorsed free-market solutions, but he made a U-turn in economic policy and reverted to a Keynesian stimulus when unemployment rose significantly. The so-called ‘Barber’ boom (named after Chancellor Anthony Barber), however, did not last long; soon the government was embroiled in a conflict with the trade unions. Trying to bolster his government, Heath called for an early election, which he narrowly lost to Harold Wilson, who was able to form a Labour minority government. Wilson had campaigned on the maintenance of the welfare state, and on regaining power, he initially increased government spending. However, Keynesian tools seemed powerless in the face of stagflation, and by 1975, Chancellor Denis Healey felt compelled to increase taxes and decrease public expenditure to tackle the budget deficit. As Healey himself recalls, ‘almost all of the spending cuts ran against the Labour Party’s principles and many also ran against our campaign promises’ (cited in Burton, 2016, p. 32). As a result, the left wing of the Labour Party rebelled and defeated proposals for further cuts by Healey in the House of Commons in March 1976. Eventually, Harold Wilson resigned as Prime Minister, but the situation escalated further when James Callaghan became the new leader of the Labour Party and Prime Minister. Investors believed that the British pound was overvalued, and there was significant downward pressure on the currency. The Labour government struggled to honour its fiscal obligations, and therefore Callaghan addressed his party in a famous speech at the Labour conference in September 1976. Callaghan argued: ‘the cosy world we were told would go on forever, where full employment would be guaranteed by a stroke of the Chancellor’s pen, cutting taxes, deficit spending, that cosy world is gone’ (Callaghan, 1976). In that same month, the government turned to the International Monetary Fund (IMF) and requested a loan to solve its difficult fiscal situation. In and of itself, this was not a dramatic event given that the UK had repeatedly borrowed from the IMF since the end of the Second World War. Based on pessimistic Treasury forecasts in 1976, however, the UK asked for the largest loan that had ever been requested up to that point. Moreover, the IMF tied the loan to economic conditions, which committed Labour to rigid spending cuts. After long negotiations with its own cabinet and the IMF, the Labour government eventually agreed to such cuts in return for a loan worth $3.9 billion. This paved the way for a bitter battle within the Labour Party and contributed to the so-called ‘Winter of Discontent’, when a series of strikes against Labour’s income policy undermined the widely accepted notion that Labour could control the unions.

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In the shadow of monetarism: 1979–97 Following the IMF crisis and the Winter of Discontent, Labour’s reputation for economic management was severely damaged and in 1979, Callaghan lost the election to Thatcher. Thatcher’s arrival heralded the rise of monetarism (Hall, 1986), but it had been the Labour Party that had dealt the first blow to Keynesianism. Even if the party’s policy was not monetarist under Wilson and Callaghan, Labour had already given more weight to inflation and less to unemployment than it had before (Hill, 2001, pp. 124–5). This was also expressed by Callaghan in his 1976 conference speech, when he said that ‘the first priority of the Labour Government must be a determined attack on inflation’ (Callaghan, 1976). This changed the discursive environment, which helped Thatcher to engineer a wholesale paradigm change. She made inflation the main goal of her ‘Medium-Term Financial Strategy’, announced in 1979. Limiting the growth of money supply and the budget deficit, she ushered in the turn from Keynesianism towards monetarism (Blyth, 2002; Matthijs, 2011). The failure of Keynesian policies to cure the economic problems of the 1970s contributed to the internal conflict within the Labour Party after 1979. Michael Foot won the leadership election as a left-wing candidate, which caused a group of MPs around the former Chancellor Roy Jenkins to break away and form the Social Democratic Party (SDP) in 1981. Foot initially tried to reassert Keynesian principles, but after the electoral loss in 1983, the tide turned within the Labour Party. Under the leadership of Neil Kinnock and Shadow Chancellor Roy Hattersley, Labour developed supply-side policies, indicating a greater focus on the need for structural changes to the economy to tackle unemployment. As Hill (2001, p. 147) argues, ‘full employment remained the objective, [but] it was recognized that traditional Keynesian reflation of the economy would not only run into a balance of payments constraint but, more seriously, a lack of industrial capacity that would be needed to cope with any such increase in demand and so generate employment.’ The Conservative government also constantly reminded the electorate about Labour’s 1970s economic record. Labour thus became concerned with increasing its economic credibility. The party decided that all policy proposals in Labour’s manifesto would undergo a careful cost assessment prior to the 1992 election. Still, the Conservatives claimed that a Labour government would raise taxes and cause inflation, calling this ‘Labour’s double whammy’. The claim that Labour would raise taxes to fund increases in government spending—dubbed Labour’s tax bombshell’—was an effective campaign message that undermined Kinnock’s efforts to overcome Labour’s image as a

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‘tax-and-spend’ party. Labour even developed a shadow budget, which was supposed to provide clarity about its tax and spending proposals, but the party still lost the election in 1992. This electoral loss had a scarring impact on the Labour Party and in the next few years, Labour’s economic policy was guided by the need to further enhance its economic credibility. Although there was a brief shift back to Keynesianism and demand-side policies immediately after the election (Corry, 1994; Hill, 2001), the party increasingly emphasized its ability to control inflation and govern responsibly. This was particularly true after Tony Blair became the leader of the Labour Party and Labour adopted the Third Way. In 1995, Blair argued in the Mais Lecture that ‘low inflation …is the essential prerequisite both of ensuring that business can invest and that supply-side measures can work to raise the capacity of the economy to grow’ (cited in Hill, 2001, p. 158). Led by Gordon Brown and his adviser Ed Balls, the party sought to assure the electorate and the business community that Labour could be trusted to run the economy. Labour, therefore, also accepted orthodox spending policies, which Brown outlined in a major speech in 1995 (cited in Keegan, 2004, p. 145): First, Labour will be committed to meeting the golden rule of borrowing—over the economic cycle, the government will only borrow to finance public investment and not to fund public consumption. Second, alongside this golden commitment, we will keep the ratio of government debt to GDP stable on average over the economic cycle and at a prudent and sensible level.

On top of these fiscal rules, Brown and Balls attempted to assure voters that Labour would not increase taxes, in order to avoid a repetition of the 1992 election. Going into the 1997 election, they pledged to maintain the Conservatives’ spending plans for two years and their levels of direct taxation for the entire Parliament. In this way, Labour’s fiscal policies had become more of a political tool to win the election than an economic tool to manage the economy. Helped by the crisis of the European Exchange Rate Mechanisms (ERMs), which undermined the Conservatives’ reputation as the sole competent managers of the economy, this proved exceptionally successful: the 1997 election swept Labour into office with a landslide victory.

New Labour’s symbiosis: 1997–2008 After their election victory in 1997, Blair and Brown moved quickly to implement their new economic policies. Four days after the election, Brown made

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the Bank of England operationally independent and committed to the fiscal rules that he had first set out in 1995. He fortified his reputation for prudence by sticking to the Conservative Party’s spending and tax plans, as the Labour Party had promised it would before the election (Keegan, 2004). As a result, Labour successfully constructed its policies as centrist (Hindmoor et al., 2004), and many observers have claimed that New Labour wholeheartedly accepted the conservative economic doctrine based on monetarism (e.g. Carstensen and Matthijs, 2018; Hay, 1999, 2004; Hutton, 1999; Mudge, 2018). However, in hindsight, the picture is more complicated in terms of both New Labour’s economic doctrine and the policies that the Blair and Brown governments actually implemented (Clift and Tomlinson, 2007; Hindmoor, 2018; Keegan, 2004). This manifests itself in two key ways. First, New Labour’s economic doctrine had a strong focus on the supply side, but it was still influenced by Keynesian economic thinking. Its economic texts and speeches were sprinkled with Keynesian references (e.g. Balls, 1998; Balls and O’Donnell, 2001; Brown, 1998, 1999a, 2001), and it never explicitly gave up fiscal policy. According to Clift and Tomlinson (2007), the central theme of New Labour’s argument was the creation of a framework which would allow the government ‘constrained discretion’ in fiscal terms. It was ‘developed to reconcile both the securing of credibility with international financial markets and substantial fiscal policy space to pursue domestic economic policies of a broadly Keynesian character’ (Clift and Tomlinson, 2007, pp. 47–8). In the words of Ed Balls himself, ‘the scope for, and likely success of, using fiscal policy to support monetary policy during a downswing in the economic cycle is likely to depend on the soundness of the medium-term fiscal position’ (Balls and O’Donnell, 2001, p. 135). Although New Labour emphasized that the government could not finetune the economy, it also argued that to do so would be a misapplication of Keynes’ ideas (Brown, 2001, p. 37). Instead, governments had to gain the credibility of international markets by keeping inflation and fiscal deficits low, enabling them to use an activist fiscal policy when it was needed. In line with the dominant macroeconomic paradigm at the time, New Labour identified inflation as an important problem but it also recognized that macroeconomic policy should be used to address other problems.2 In other words, Brown believed in the importance of full employment as an economic objective, but in line with supply-side Keynesianism, he argued that macro2 For example, in his Mais Lecture in 1999, Brown said: ‘the role of a macroeconomic policy is not simply to bear down on inflation but by creating a platform of stability to promote growth and employment …in other words, macroeconomic and microeconomic policy are both essential—working together—to growth and employment’ (cited in Clift and Tomlinson, 2007, p. 55).

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and microeconomic concerns could not be separated. He took a strong interest in supply-side policies and changed the role of the Treasury accordingly (Keegan, 2004, p. 247). In the short run, New Labour ‘carefully reserve[d] a role for demand management in determining the level of employment, albeit alongside supply-side policies’ (Clift and Tomlinson, 2007, p. 57). Second, the importance of Keynes for New Labour also became obvious in the policies that Labour pursued in government. After coming to office, the party implemented a sequential strategy (Keegan, 2004, p. 242). In the first two years in office, Brown stuck to the Conservative freeze on public spending. In these two years, fiscal policy was mostly used politically: to gain the trust of voters and markets by proving that Labour could control and direct spending in a responsible manner (cf. Keegan, 2004, p. 250). Brown and Balls repeatedly rejected the concept of ‘tax-and-spend’ for political purposes. As Hopkin and Alexander Shaw (2016, p. 356) argue, ‘by signing up to the economic orthodoxy of the time …Labour could gain credibility in the financial markets and reassure markets and voters that the party would run the economy competently’. After Labour had proven that it could control public spending in the first two years, it changed course, however. In the Comprehensive Spending Review of 1998, the government laid out its plans to increase spending. Labour still argued that the government would only spend what it could afford, but it noticeably increased spending from 1999, especially investment in health and education (Carstensen and Matthijs, 2018). In hindsight, this two-step strategy was successful. By increasing Labour’s fiscal credibility, it allowed the government to shape the popular consensus that investment in public services was both necessary and affordable. Subsequently, Labour brought welfare standards closer to the levels of provision in continental Europe (Gamble, 2005) and pursued ‘redistribution by stealth’ (Keegan, 2004). Overall, New Labour increased the ratio of government expenditure to GDP from under 36 per cent in 1998 to 41.4 per cent in 2007. As The Guardian’s economics editor Larry Elliott (2000) wrote in 2000, this led to the rehabilitation of Keynes in the Treasury and ‘the big increase in departmental spending …was, according to Brown’s advisers, the beautiful Keynesian butterfly emerging from the ugly monetarist chrysalis’. Thus, New Labour’s fiscal strategy had political and economic objectives. After the government had addressed concerns that Labour might be fiscally irresponsible, it used the Treasury to play a more active role in the economy again. On the one hand, the architects of New Labour accepted the importance of low inflation as well as the dominance of supplyside factors to determine long-term economic growth. On the other hand,

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New Labour believed that the state had an important role to play in the economy. In line with the dominant macroeconomic consensus, it implemented supply-side investment to improve the productivity of the economy, but it was also ready to actively manage demand when the financial crisis hit.

Economic crisis and the response of the Labour Party When the financial crisis struck with full force in September 2008, Labour had been in government for eleven years. In the uncertainty following the collapse of Lehman Brothers, the British stock market collapsed and some of the largest British banks were pushed to the brink of default. Moreover, the financial crisis also had a significant impact on the British real economy. Despite attempts to reflate the economy, British GDP contracted sharply by 4.3 per cent and unemployment increased to 7.6 per cent in 2009 (Figure 6.1). The fall in GDP was the steepest since the 1930s, which created fears that the UK would face a long depression. In the end, it recovered fairly quickly: it returned to growth again in 2010. Still, the economy continued to experience meagre growth until 2013 and it nearly entered a double-dip recession in 2012, when GDP grew only marginally. To examine the Labour Party’s response to this economic crisis, I use the data from Chapter 3. The advantage of using this data is that it allows me to again classify economic issues into three economic meta-categories used earlier, i.e. welfare, economic liberalism, and budgetary rigour. For six northwestern European countries, the data set also includes data from elections since the 1990s and one election from the 1970s as a historical benchmark. This enables me to put Labour’s economic response to the Great Recession into historical perspective. To focus on Labour’s larger programmatic shifts over time, I classify the elections into five different periods, shown in Table 6.1. For each period, I first calculate the overall left–right positions of the Labour Party and the Conservatives to examine whether there was a neoliberal convergence before the crisis. The results are shown in Figure 6.2. It indicates that Labour and the Conservatives already shared relatively similar economic programmes in the 1970s, as their weighted left–right positions are relatively close to each other. Following the logic of the majoritarian electoral system, both parties attempted to occupy the centre ground and compete for the median voter. Nonetheless, it is surprising that the Labour Party’s left–right position in the 1990s and the early 2000s was similar to its position in 1976. Although New Labour’s Third

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Percentage change

5.0

2.5

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Figure 6.1 UK real GDP growth and unemployment rate, 1970–2015 Note: The figures show the UK’s real GDP growth rate (top) and unemployment rate (bottom) from 1970 to 2015. Source: OECD

Way distinctively changed the way the party talked about the economy, this did not translate into a radically different electoral programme. In the context of the crisis, however, Labour shifted its position towards the left, as indicated by Figure 6.2. The shift was greatest after Jeremy Corbyn had become the leader of the Labour Party, but it was already substantial during the Great Recession. This crisis partly reversed the convergence of Labour

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Fiscal Policies of the British Labour Party Table 6.1 List of elections by time period Time Period

Election

1970s 1990s Pre-crisis Crisis Post-crisis

1974 1992, 1997 2001, 2005 2010, 2015 2017

1970s

1990s

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Conservatives Labour

Crisis

Post−crisis −1.0

−0.5

0.0 Left−right position

0.5

1.0

Figure 6.2 Left–right position of Labour and the Conservatives over time Note: The figure shows the weighted average position of Labour and the Conservative on all three economic issue categories (welfare, economic liberalism, and budgetary rigour). The positions are weighted by the relative salience of each category.

and the Conservatives, as the gap between the two parties widened in the 2010 and 2015 elections. To properly characterize Labour’s response to the crisis, it is useful to distinguish between its positions on the three different economic categories identified earlier (welfare, economic liberalism, and budgetary rigour). The results of this exercise are plotted in Figure 6.3. It shows that there was already some degree of variation in Labour’s economic position in the 1970s. Its position on the welfare state was more left-wing than its position on economic liberalism, while it adopted centrist fiscal positions. In the 1990s, these differences disappeared as the party moved towards the right on welfare and to

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1970s Category Budget 1990s

Economic liberalism

Period

Opposition to welfare Pre−crisis

Salience 0.2 0.3

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0.4 0.5 Post−crisis

−1.0

−0.5

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Left−right position

Figure 6.3 Left–right position of the Labour Party for different economic categories over time Note: The figure shows Labour’s positions on different economic issue categories. The value of +1 refers to support for budgetary rigour, economic liberalism, and opposition to welfare, respectively. The size of the symbols corresponds to the relative salience of each category for each party.

the left on budgetary rigour. In this period, which covers both the 1992 election campaign under Kinnock and Blair’s first election victory in 1997, the Labour Party had a very consistent programme. However, this consistency was short-lived. As the Third Way took shape in the 1990s, Labour adopted noticeably more centrist positions on economic liberalism and budgetary rigour. The party bought into the dogma of the day and supported a flexibilization of labour markets and the deregulation of the economy. Despite increasing government spending from the late 1990s onwards, it also continued to rhetorically support a prudent fiscal programme. It was only in terms of welfare that Labour moved to the left again before the financial crisis. At least in electoral campaigns, the party combined a commitment to the welfare state and public service provision with economic liberalism and fiscal rigour. The financial crisis undermined this Third Way programme. The party shifted its position on welfare further to the left and it reversed its support for economic liberalism. It became noticeably less enthusiastic about

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free markets and began to champion state intervention again. For example, the party’s leadership supported tighter financial regulation, attempted to rekindle its relationship with the unions, and developed new ideas for state intervention. At the same time, Labour hardly changed its position with regards to budgetary rigour. It endorsed orthodox fiscal policies that only marginally differed from the Conservative position. This only changed when Jeremy Corbyn was elected as the leader of the Labour Party in the wake of its 2015 election defeat. By the time of the 2017 election, Corbyn had changed the party’s programme noticeably, adopting left-wing positions with regard to all three issue categories. In retrospect, it is puzzling that this did not happen earlier. The Labour Party under Brown and Ed Miliband lacked a coherent platform based on an economic paradigm, as defined by Hall (1993); rather, it combined individual policy initiatives in a piecemeal fashion. By doing so, it not only failed to win the elections in 2010 and 2015, but also paved the way for Corbyn and his allies to take over the Labour Party. The analysis so far, therefore, begs the question of why the Labour Party under the leadership of Brown and Miliband did not change its position on budgetary rigour in response to the economic crisis. Why did Brown and Miliband favour orthodox fiscal policies?

Explaining austerity from the left in the UK To explain Labour’s puzzling fiscal policy in response to the Great Recession, I use ‘explaining outcome process tracing’ (Beach and Pedersen, 2013). The analysis starts in 2008 after the beginning of the financial crisis, and it ends in 2015, when Labour lost the election and Corbyn was elected as the leader of the party. My main sources are twenty elite interviews with Labour politicians and policymakers, conducted between September 2016 and April 2017. These interviews allow me to unpack the official narrative behind Labour’s economic programme and to elucidate the causal mechanism behind the party’s response to the crisis. A list of all the interviews conducted is available in the Appendix at the end of this chapter, which also explains the rationale for selecting the interviewees. I combine the insights from the interviews with evidence from primary and secondary sources, including official documents and public statements from leading social democrats.

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The crisis years—Labour’s response to the financial crisis, 2008–10 Priming the pump: bank bailouts and Keynesian demand stimulus In response to the financial crisis in the autumn of 2008, the Labour government took decisive action. Chancellor Alistair Darling announced a large bank rescue package before stock markets opened on the morning of Monday, 8 October 2008. As Darling put it in a statement in the House of Commons on the same day, the rescue package was ‘designed to restore confidence in the banking system and to put banks on a stronger footing’ (Darling, 2008). The package went a long way towards achieving these aims, but the UK government soon became concerned about the effects of the financial crisis on the real economy (Dan Corry, personal interview, 17 November 2016). Consequently, the government also prepared a large fiscal stimulus programme, most of which was announced in the annual Pre-Budget Report in November 2008. The measures included a tax cut for basic-rate taxpayers, a temporary cut in value-added tax (VAT), and investment spending worth £3 billion brought forward from 2010. On top of the automatic stabilizers, the discretionary fiscal measures totalled around £20 billion, as estimated in the Pre-Budget Report. Both the recapitalization of the banks and the stimulus programme were a clear return to Keynesian economic policies. After more than a decade of New Labour emphasizing the importance of fiscal prudence, the government’s rhetoric had radically changed. According to Darling, both he and Brown were ‘fearful that the recession could turn into a depression’ (personal interview, 13 December 2016). As emphasized by Thorsten Bell, a former adviser at the Treasury, ‘there was a strong consensus that we had to support the economy in response to the biggest recession in history since the 1930s and our actions were guided by this need to protect the economy’ (personal interview, 13 December 2016). Although some of the government’s policies were based on a common-sense perception that it had to act, the most important actors were influenced by Keynesian thinking (John Denham, personal interview, 21 April 2017). For example, Darling (2011, p. 176) justified the stimulus in the following way: ‘When households and companies spend less, and governments cut public spending, recession risks turning into depression. The argument for maintaining public spending is therefore quite straightforward …certainly, to start cutting public spending midway through 2008 would have jeopardised millions of jobs.’ He continued by saying:

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In late 2008, I was influenced hugely by Keynes’s thinking …I could see that if we did not maintain our spending levels, we ran the severe risk of an inevitable recession turning into a deep depression which might last for years. More than that, I felt the government would have to do something extra to stimulate economic growth. (Darling, 2011, p. 177)

To this end, Brown also formed the National Economic Council, a new body that became known as an ‘economic war council’ and which was set up to develop strategies with which to respond to the economic crisis. Co-chaired by Brown and Darling, the body was designed to ‘try to get Departments and the Treasury to clear the deck, abandon old plans, and force everyone to think anew’ (Dan Corry, personal interview, 17 December 2016). Brown knew that the financial crisis was a challenge to the prevailing economic doctrine and was hoping to take quick and coherent action that would not be obstructed for bureaucratic reasons. As one economic adviser recalls, ‘it was like bang, bang, bang. We went from the bank recap into the fiscal stimulus, into asset protection and then quantitative easing (QE). It was just like a series of horrific events’ (Seldon, 2011, p. 253). However, Brown was also acutely aware of the international dimension of the crisis (Patrick Diamond, personal interview, 25 October 2016; John Denham, personal interview, 24 April 2017). He realized that action by a single government would not be sufficient to address the adverse impact of the crisis. On top of reflating the domestic economy, Brown worked hard to create an international consensus on the need for stimulus programmes. He was instrumental in initiating a G20 summit in Washington in November 2008, where leaders agreed on the need to stabilize financial markets and limit the effects of the crisis. As Kinnock put it, ‘Gordon Brown used his contacts in the finance ministries around the world to orchestrate global action in a Keynesian way’ (personal interview, 6 December 2016). Given the importance of New Keynesianism for New Labour’s economic doctrine, this response was not surprising. Hay (2011, p. 253) views it as a case of ‘inter-paradigm borrowing’, but as we have seen earlier, there was a clear continuation of ideas. New Labour did not ‘[rediscover] the political economy …of John Maynard Keynes’ (Lee, 2009, p. 30) in 2008; rather, the crisis revealed how important Keynesian ideas had remained for them. New Labour had never fully bought into the monetarist paradigm, but its resolve to use Keynesian emergency politics had not been tested before 2008. This is true even though the increase in discretionary fiscal spending was actually modest compared to what some other countries (like France and Germany) did in 2008 and 2009 (Hodson and Mabbett, 2009). The government relied on

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tax cuts more than its equivalents did, and it allowed the automatic stabilizers to work, which also contributed to the stimulus (Darling, 2011). Moreover, as emphasized above, the UK government was also instrumental in orchestrating an international response to the financial crisis that was very much inspired by Keynesian economic thinking. The Darling Plan: Labour’s disagreement about how to manage the deficit Despite the government’s attempts to boost demand, the British economy contracted significantly in 2009. Paradoxically, a few months after the beginning of the financial crisis, the most salient economic problem discussed in the public sphere was not growth or unemployment but the government’s deficit. The deficit grew to nearly 10 per cent of GDP in 2009, as the bank rescue packages, automatic stabilizers, and the stimulus programme increased government spending to a level that had not existed in Britain for several decades (see Figure 6.4).3 At the same time, the government’s revenues took

Percentage of GDP

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Variable Spending Revenues

40

35

1970

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1990 Year

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Figure 6.4 UK government spending and revenues, 1970–2015 Note: The figure shows the level of the UK government’s total spending and total revenues as a share of the country’s GDP. Source: OECD

3 In Britain, the magnitude of this deficit was at a level unprecedented since the 1970s. Although the ratio of government spending to GDP had increased steadily under New Labour since 2000, it shot up during the economic crisis. This was partly caused by the fall in GDP, but even in absolute terms, the increase in spending was significant.

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a sharp hit, as the government cut VAT in 2008, and the financial crisis significantly reduced the revenues that the government collected from the financial sector. In response to the large deficit, public discourse increasingly became concerned with the sustainability of the rising level of government debt. Although most economists and observers had initially agreed that government spending was crucial to prevent an even deeper fall in output, the crisis was soon portrayed as a ‘crisis of debt’ instead of a ‘crisis of growth’. This discursive environment presented a new problem for the Labour government, as it raised the question of how to respond to the rising deficit. The answer to this question was non-trivial, exposing a split within the government and the Labour Party as a whole that would undermine the coherence of Labour’s fiscal policies for years to come. The split first emerged in spring 2009 during the preparations for the annual budget, when senior officials in the Treasury became nervous about the size of the deficit. They feared that the government was ‘skating on thin ice’ with regard to the bond and currency markets (Rawnsley, 2010, p. 680).⁴ Many key actors recalled the 1976 crisis when the Labour government had had to request a loan from the IMF (Nick Thomas-Symonds, personal interview, 5 October 2016); the most senior civil servant in the Treasury, Nick Macpherson, was determined that this would not happen again (Seldon, 2011, p. 368). These concerns were fuelled by a series of events. In March 2009, the UK government failed to sell all government bonds in an auction for the first time in seven years (BBC News, 2009). Additionally, in May 2009, the rating agency Standard and Poor’s placed the British triple-A rating under review for the first time in three decades (Conway, 2009). In this situation, the Chancellor increasingly came to believe that the government would have to present a plan on how to handle the deficit. He wanted to retain the confidence of both capital markets and voters by committing the government to halving the deficit over a four-year period—which became known as the ‘Darling plan’. His plan placed more prominence on tax increases over spending cuts to achieve fiscal consolidation compared to the Conservatives, but Darling and his advisers at the Treasury still believed that there would have to be cuts in government spending in order to make the numbers work (economic adviser A, personal interview, 13 December 2016). Prime Minister Gordon Brown resisted this turn towards economic orthodoxy. He believed that the Treasury’s forecasts for growth and the size of the ⁴ For example, the former Financial Services Secretary Paul Myners recalls saying to the Chancellor, Alistair Darling: ‘we have to be careful, Alistair. If the markets refuse to buy sterling paper, we’ll be in really big trouble’ (quoted in Rawnsley, 2010, p. 680).

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structural deficit were too pessimistic in 2009 and that the government had to maintain its role as the spender of last resort. He was supported by Balls, who recalls saying to Brown and Darling that it would be ‘unachievable to halve the deficit by 2015’ and that the government ‘should not be cutting spending until the economic recovery was secured’ (personal interview, 12 December 2016). For both Brown and Balls, cutting the deficit was secondary in importance to fostering growth, which would eventually also reduce the deficit and level of debt. As an economic historian, Brown thought extensively about the experience of the Great Depression, when the UK government had worsened the economic crisis by implementing orthodox economic policies (Patrick Diamond, personal interview, 25 October 2016). As Seldon (2011, p. 368) argues, ‘for Brown …a reluctance to talk about cuts and turn away from a single-minded focus on growth was simply consistent with his Keynesian beliefs’. Brown was also reluctant to cut government spending for political reasons, let alone use the word ‘cuts’ in public statements, because he was aware of the potential implications that such a pledge could have for the Labour movement. Influenced by the work of economic historians like Robert Skidelsky (1970), he knew that in the 1930s, Labour Prime Minister Ramsay MacDonald and Chancellor Philip Snowden had divided the Labour movement by implementing austerity. Allegedly, Brown even said to some of his advisers: ‘I refuse to be the next Ramsay MacDonald’ (Patrick Diamond, personal interview, 25 October 2016).⁵ Furthermore, Brown believed that New Labour owed much of its success in the 2001 and 2005 elections to the political narrative that had pitted Labour investment against Tory cuts. He wanted to maintain this division ahead of the 2010 election, fighting the election on the back of Labour’s successful investment in public services. Throughout 2009, this division within the government created tensions and the 2009 budget became a compromise between Number 10 and the Treasury. It included Darling’s pledge to halve the deficit over the next four years, but it did not include any immediate measures to reduce government spending; rather, the budget announced future spending cuts and tax increases to close the deficit. The budget was not well received by the press, and the relationship between Darling and Brown remained strained. Brown even made plans to replace Darling with Balls, whose opinions on the deficit

⁵ According to Seldon (2011, p. 367), Brown said: ‘I want a Labour budget, I don’t want a Snowden budget’ and, to his Principal Private Secretary Jeremy Heywood, added, ‘you are not going to turn me into Snowden’.

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40

Percentage

Party 30

Tories Labour Lib Dems UKIP Greens

20

10

20

14

12

Ja n

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Figure 6.5 UK polls, 2005–15 Note: The figure shows the average monthly support for UK parties based on surveys that ask about vote intention. For any given month, it is calculated based on observations gathered by several different polling companies.

were much closer to his own (Rawnsley, 2010; Seldon, 2011). Yet, during the summer of 2009, the pressures on Brown’s government increased. After a disastrous result for Labour in the local and European elections, there were several resignations from the cabinet and Brown was widely criticized for mishandling the MPs’ expenses scandal. In the face of very low support for the Labour Party in the polls (as shown in Figure 6.5), there were even rumours of a coup against Brown. Brown was thus operating from a position of weakness. He did not go through with his plan to replace Darling with Balls and lost the economic argument within the government. This became obvious in September 2009, when he first used the words ‘cuts’ in public. At the annual conference of the Trades Union Congress (TUC) in Liverpool, Brown agreed to say: ‘Labour will cut costs, cut inefficiencies, cut unnecessary programmes, and cut lower priority budgets’ (Brown, 2009). As one could have expected, the speech was fiercely criticized by the trade unions. Afterwards, Brown was furious that his advisers and the Treasury had urged him to speak about cuts. Talking to Peter Mandelson, who had returned from the European Commission to join Brown’s cabinet, he said: ‘we should not be in this place! Don’t give me all this about spending cuts! We should not have gone down this course. It’s got to be about growth, not the deficit. Cuts versus cuts will just kill us’ (quoted in

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Rawnsley, 2010, pp. 679–80). Yet, his advisers remained firm.⁶ Like Darling, they argued that the public had moved on from the old dividing line between Labour investment versus Tory cuts. In their opinion, the fundamental lesson from New Labour was that Labour’s economic plans would only receive a fair hearing from voters if the media and the public believed that the party was fiscally prudent. As Labour’s political fortune looked increasingly wobbly throughout 2009, these arguments gained traction within the government because Brown also realized that the politics of the deficit were becoming a problem (Patrick Diamond, personal interview, 25 October 2016). Furthermore, Mandelson weighed into the debate and sided with Darling. After the media had accused Brown of a disregard for reality, Mandelson believed that Brown was wrong to create ‘the impression that we would simply keep on spending, borrowing, and taking on debt’ (Mandelson, 2010, p. 477).⁷ Over the course of 2009, this position became dominant within the government. As the elections in 2010 came closer, the politics of the deficit grew to be more important than the economics. In the words of Kinnock, a widespread belief had crystallized that ‘Labour needed to prove that they [had] got the arithmetic right’ (personal interview, 6 December 2016); they needed to shore up their fiscal credibility. Consequently, Darling’s position prevailed, while Brown was pushed away from his opposition to spending cuts. Darling and his advisers were no fiscal hawks either, however. Darling agreed with Brown that there should not be a three-year spending review ahead of the election and believed that the prevailing uncertainty made clear predictions difficult (Darling, 2011). He emphasized tax increases over spending cuts and agreed to a list of protected spending areas (including health, schools, the police, and development). Yet, he was adamant that the voters and the markets demanded a medium-term plan to get spending and debt under control. In his own words, opinion polls showed that voters were ‘angry about the recession and the threat to their jobs and they couldn’t readily comprehend how increased borrowing or spending would make things better’ (Darling, 2011, p. 225). He believed that the government had to gain voters’ trust by showing that Labour was prepared to tackle the deficit to get borrowing down (personal interview, 13 ⁶ In retrospect, Dan Corry reflected: ‘politically it was difficult to manage the situation. You cannot possibly say that the deficit is going up this high without planning to do anything about it. That would have just been bonkers’ (personal interview, 17 November 2016). ⁷ Expanding on this topic, Mandelson recalls this episode in the following way: ‘Gordon was resisting any talk of new cuts in spending to reduce the deficit and debt. I was sure he was right to argue that the last thing the economy needed at a time of recession was any early reduction in government stimulus. But there was also politics involved, and the inevitable impression that we were simply in denial about the scale of the financial hole we found ourselves in …as long as no-one believed us about the public finances, they wouldn’t believe us on anything else’ (Mandelson, 2010, pp. 476, 504).

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December 2016). To this end, Darling even promised in a BBC interview after the presentation of his budget in 2010 that Labour’s cuts would be ‘deeper and tougher’ than Thatcher’s had been in the 1980s (Elliott, 2010). With this language of cuts, the Labour Party had all but abandoned Keynesian notions in public discourse before the 2010 election and across parties, the election campaign was marked by a consensus that the deficit had to be reduced. In the final budget before the election, Darling attempted to make his plans for deficit reduction credible, by setting out cuts and savings of £11 billion across the UK government and further £5 billion from targeted spending. Still, Labour’s shift did not have the desired effect. Instead, it forced the government to abandon popular positions, created inconsistencies within its programme, and played into the hands of the Tories: by moving its own discourse towards economic orthodoxy, the Labour Party allowed the Tories to criticize their handling of the economic crisis and discredit their claim to competence. As D’Ancona (2013, p. 42) notes, ‘one of the great achievements of the Conservative campaign was to force the idea of the deficit across voters’ doorsteps, explain that it was a bad thing, and persuade them that Brown and his gang would never deal with it’ (cited in Burton, 2016, p. 75). This strategy helped the Conservatives to oust Labour from power in 2010. As the deficit became one of the most important issues in British politics, Brown was punished for having been in government when the crisis struck, which all but destroyed Labour’s perceived economic competence.

The austere years—Labour in opposition, 2010–15 ‘Too far, too fast’: Labour’s critique of austerity After the 2010 general election, the Conservatives and the Liberal Democrats formed a coalition government and quickly implemented austerity. The new Chancellor, George Osborne, first announced spending cuts of £6.2 billion a few weeks after the election. At the same time, he warned that more measures would be necessary and announced that there would be an emergency budget. He laid the ground for this emergency budget in his Mansion House speech in June 2010. In the shadow of the first Greek bailout, he warned of the danger of a sovereign debt crisis and blamed Labour for the size of the budget deficit. He stated: ‘dealing with this inheritance from its predecessor is the single greatest economic challenge the new Government faces’ (Osborne, 2010). Intending to eliminate the structural deficit by 2015–16, he introduced massive spending cuts and tax increases in the emergency budget. In line with the expansionary fiscal consolidation thesis, he argued that ‘reducing

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the deficit [was] a necessary precondition for sustained economic growth’ (HM Treasury, 2010, p. 1). Labour, which found itself in opposition for the first time in thirteen years, struggled to respond to this policy. After the election, Brown quickly resigned as the leader of the Labour Party, paving the way for a leadership election during the summer of 2010. As a result, Labour lacked a leader while the coalition government was setting the terms of the fiscal debate. The coalition blamed the Labour government for the state of public finances and argued that exceptional measures were necessary to reduce the deficit that it had inherited from Labour. This narrative was powerful because Labour had become ‘a punching bag’ for both the Tories and the Lib Dems (Robert Skidelsky, personal interview, 24 April 2017). The latter had not been in favour of deep spending cuts before the 2010 election, but they made a U-turn when they entered the coalition government. They justified this reversal by citing the exceptionally bad state of the public finances that Labour had left them. A personal note written by Liam Byrne, the Labour Chief Secretary in the Treasury, which he had left to his Lib Dem successor after the 2010 election, helped their case. It read: ‘I’m afraid to tell you there’s no money left’. This became the dominant perception of Labour’s record in government even though it had been intended as a joke (Nick Thomas-Symonds, personal interview, 5 October 2016). The coalition government thus used clever political rhetoric to shield itself from criticism. Despite the scale of the cuts, it made ‘Labour’s debt’ the defining political issue, giving itself an excuse to make unpopular choices. Labour’s response to the coalition government became more effective after the leadership election in September 2010 had been decided. With the support of the trade unions, Ed Miliband won a surprise victory against his older brother David Miliband and was determined to build a strong opposition to the Tory government. He ‘was the first leader since Michael Foot [who] believed that Labour’s route to power was to move to the left’ (Balls, 2016, p. 261). Addressing the Labour conference after his election as the leader of the party, he argued that ‘economics teaches us that at times of recession governments run up deficits’ and that ‘what we should not do as a country is make a bad situation worse by embarking on deficit reduction at a pace and in a way that endangers our recovery’ (Miliband, 2010). Still, Miliband was concerned that a ‘forthright Keynesian critique of the government’s austerity programme could be painted as “deficit denial” ’ (Bale, 2015, p. 32). His first appointment as Shadow Chancellor of the Exchequer was Alan Johnson, who tried to stick to the Darling plan. For example, in response to the

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coalition’s Spending Review, Johnson argued: ‘there is another way, a balanced approach that gets the deficit down, but recognises that growth and jobs are not a sideshow to an economic strategy’ (Mulholland, 2010). Yet, Johnson resigned after three months as Shadow Chancellor and made way for Ed Balls in January 2011. Balls had outlined his arguments about the right response to the economic crisis in a speech at Bloomberg that he made during Labour’s leadership election in August 2010. Drawing on Keynesian ideas, he argued: ‘the coalition’s plans for rapid deficit reduction now are not just unfair but also unnecessary and economically unsafe’ (Balls, 2010). In his opinion, growth and jobs should have been the priority in 2010 and 2011 because ‘the danger of too rapid deficit reduction is that it proves counter-productive’. He called on Labour ‘to set out a clear plan for growth, a more sensible timetable for deficit reduction, and a robust explanation of why that will better support our economy and public finances’ (Balls, 2010). Initially, Miliband worried that these arguments would not strike the correct chord with the public and would fly in the face of common sense. He was hesitant to appoint Balls as his Shadow Chancellor; he dropped his reservations only after Balls had agreed to stick to the Darling plan as Labour’s official policy (Bale, 2015, p. 40). After Balls had become Shadow Chancellor, he still attempted to set out an alternative to the coalition government’s approach, translating his argument from the Bloomberg speech into Labour policy. He claimed that the government’s spending cuts were a ‘reckless gamble’ and were harming the country’s economy. Balls argued that the cuts were going ‘too far, too fast’, and in retrospect, he still maintains that this position was correct: In 2010, at a time when the recovery was vulnerable and when the eurozone crisis had just erupted, it was not the right time to have a rapid tightening of fiscal policy …it was a dangerous time to cut fiscal spending. Once monetary policy had gotten to the zero lower bound, it was nonsense to argue that tighter fiscal policy allowed for looser monetary policy. (Ed Balls, personal interview, 12 December 2016)

Balls’ argument, however, failed to gain a lot of traction with voters. As shown in Figure 6.6, in 2010, a large share of the electorate thought that the reduction of the country’s level of debt could not be delayed. This relatively broad support for fiscal consolidation was also shown in a variety of opinion polls and focus group research that the Labour Party itself had commissioned (Bale, 2015). This research demonstrated that the problem for Labour was even more fundamental than the party had thought, because the electorate not only believed that fiscal consolidation was necessary but also blamed Labour

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Figure 6.6 Attitudes towards government debt in the UK, 2010–15 Note: The figure shows the share of UK respondents who agree/disagree with the statement that ‘measures to reduce the public deficit and debt in (OUR COUNTRY) cannot be delayed’. It is based on Eurobarometer surveys from 2010 to 2015.

for the fact that these austerity policies were needed in the first place. A large share of voters blamed the party for the state of the public’s finances in 2010 and criticized Labour for wasteful spending and bad economic management (Marc Stears, personal interview, 9 November 2016; John Denham, personal interview, 24 April 2017). Following the narrative that the coalition government had set in the summer of 2010, the deficit was seen as ‘Labour’s mess’. As Goes (2016, p. 77) argues, ‘the Conservatives and the Liberal Democrats had successfully managed to convince the public that Labour’s “irresponsible” policies …were responsible for the country’s public deficit and debt’. The question of how to address the party’s past became important for Labour, and several internal memos were written in search of an answer, for example, by former journalist Thomas Baldwin and pollster James Morris (Thomas Baldwin, personal interview, 13 December 2016). In private, Labour’s leadership did not think that New Labour had overspent before the crisis. While they accepted that the administration’s lax attitude towards the financial sector had been a mistake, both Miliband and Balls believed that New Labour’s investments in the early 2000s had saved British public services. Moreover, they believed that government spending before the crisis had certainly not caused the UK budget deficit, which was largely the result of the financial crisis. Although some Labour advisers thought that the party should make these arguments in public (Thomas Baldwin, personal

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interview, 13 December 2016; Marc Stears, personal interview, 9 November 2016), the results from focus group research were discouraging. The evidence supposedly showed that the voters could theoretically be convinced that the crisis and the deficit were not ‘Labour’s mess’, but this would take a large amount of time and effort, thereby crowding out any possible communication about Labour’s plans for the future. Labour believed that the evidence ‘showed that there were two options: either you can have a debate about the past or about the future but you cannot do both’ (John Denham, personal interview, 24 April 2017). Balls believed that Labour’s position was ‘not strong enough to take on the Tories, the Lib Dems, and the media all at the same time’ and that ‘an argument about what happened in the past would take it onto Osborne’s ground, whereas an argument about what we would actually do in the future would be more fruitful for us’ (Ed Balls, personal interview, 12 December 2016). Therefore, the party made the political judgement that it was more important to speak about Labour’s future plans rather than the past, and it never addressed the allegations that Labour was to blame for the crisis head-on. Instead, Labour’s strategy of regaining fiscal credibility while still criticizing the government was twofold. On the one hand, Labour accepted that fiscal consolidation was necessary, but Balls continued to criticize the speed of the deficit reduction. He argued that under Osborne’s watch the economy was ‘flatlining’ and that austerity would choke off the recession and cause a double-dip recession. Although he did not believe that the deficit could be ignored, Balls thought ‘that a balanced, more Keynesian plan in the middle was more sensible’ and would protect growth and jobs in the British economy (Ed Balls, personal interview, 12 December 2016). At a joint press conference in 2011, Miliband and Balls stated that ‘the best way to get the deficit down was to develop a plan that puts jobs and growth first’ (Goes, 2016, p. 78). Further, at the Labour conference in 2011, they unveiled a five-point plan for economic growth, which included temporary action on VAT, a levy on bank bonuses, and initiatives for housing and youth employment, as well as the idea of bringing forward infrastructure projects (Balls, 2011).⁸ On the other hand, Miliband tried to reframe the economic debate and move it onto more favourable ground for Labour. He set out a fundamental critique of British capitalism and increasingly spoke about inequality (Miliband, 2010, 2011). Focusing on the level of wages and the perceived wellbeing of citizens, he maintained that many people were struggling to get by. ⁸ At the same time, Balls kept criticizing the coalition’s insistence on austerity. For example, in response to the 2012 budget, he stated in Parliament: ‘the Chancellor is not Robin Hood, he’s the Sheriff of Nottingham. And as for jobs and growth, he couldn’t give a Friar Tuck’ (Balls, 2016).

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He repeatedly spoke of the so-called ‘cost-of-living crisis’ and the ‘squeezed middle’. Influenced by his economic adviser Stewart Wood, he criticized the British growth model for its excessive reliance on finance and believed that a reform of the British political economy in the direction of continental capitalism would create a more prosperous and equal society. The return to prudence: Labour’s shift towards fiscal responsibility Labour’s dual economic agenda was undermined midway through Parliament by the changing economic conditions themselves. In early 2013, it emerged that the UK had narrowly averted a double-dip recession in 2012; in 2013, growth returned more strongly than expected, while unemployment dropped again (Figure 6.1). Although austerity weakened the UK recovery that had begun in 2010, the effects of the coalition’s economic programme were not as dramatic as Labour and many economists had expected. Partly this was because of the Bank of England, which had aggressively pursued QE. This monetary policy helped to soften the macroeconomic effects of austerity and, therefore, it ‘acted as an insurance policy for the Conservatives’ (Robert Skidelsky, personal interview, 25 April 2017). Unemployment in the UK remained relatively low and dropped again in 2013, as new jobs were created. The quality of those jobs was lower than that of those lost during the recession and there were a large number of workers working part-time or who were underemployed. Yet, this did not show up in the headline figure of unemployment, which seemed to contradict Labour’s warnings. These economic circumstances created another challenge for the Labour Party under Miliband. Kinnock recalled that ‘only the Tory backbench was more surprised than Labour that the double-dip recession did not happen’ (personal interview, 6 December 2016), while Robert Skidelsky argued that ‘the Keynesians had logically overstated their case [against austerity] based on the counterfactual’ (personal interview, 25 April 2017). Balls had tied himself to the notion that austerity would lead to economic failure by predicting that the British economy was flatlining due to Osborne’s policies. As the Financial Times wrote in 2013, ‘the shadow chancellor’s predictions of a “lost decade” of slow growth …left him politically exposed’ (Parker and Pickard, 2013). The Labour leadership, therefore, reconsidered its options. In line with New Keynesian thinking, it came to believe in 2013 that the output gap was closing, albeit at a diminished rate compared to that of the pre-crisis period (Ed Balls, personal interview, 12 December 2016; Rachel Reeves, personal interview, 7 December 2016). In other words, Labour believed that the financial crisis and the austerity programme had been a negative supply shock, reducing the UK’s potential output. The state of employment was inferior

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to that of the pre-crisis period, wages were still stagnating, and productivity growth was absent. But in the party’s thinking, this was not due to a lack of demand in the British economy. In retrospect, Balls explains his way of thinking in the following way (personal interview, 12 December 2016): By 2013, I had to plan on my inheritance being not an economy below trend but an economy which was on par with a diminished trend. In those circumstances, I could not be in fiscal denial. …Whatever I said about growth, it was becoming clear that there would have to be some form of fiscal consolidation because there was absolutely a structural deficit, not only a cyclical deficit.

The need to reconsider Labour’s macroeconomic programme also emerged for political reasons. Since the beginning of 2012, the Labour Party had enjoyed a small lead in the polls. However, internal polling suggested that there was still a large ‘credibility gap’ between Labour and the Conservatives with regard to the economy and that most people in the UK thought that the economy was going in the right direction (Rachel Reeves, personal interview, 7 October 2016). After disappointing results in the local elections in 2013, influential advisers argued for a new economic approach. Strategists like Greg Beales, James Morris, and David Axelrod had always urged Ed Miliband to pay attention to the polls, but when Douglas Alexander and Spencer Livermore joined Miliband’s team as new advisers, this argument became even louder (Marc Stears, personal interview, 9 November 2016). Alexander and Livermore believed that Labour’s poll lead was soft and very vulnerable to possible attacks from the Conservative Party. Drawing on the experiences of New Labour in the mid-1990s, they argued that Labour would have to nail the question of the deficit and increase its economic credibility to win the general election. Although they denied that they had a so-called 35-per-cent strategy, they believed that Labour had to play its cards well to benefit from the political currents. As both Lib Dem and Conservative voters were disappointed with the coalition government, Miliband’s advisers identified two likely trends: while disappointed Lib Dem voters would turn towards Labour, disappointed Tory voters would support UKIP (Jon Cruddas, personal interview, 5 December 2016; Thomas Baldwin, personal interview, 13 December 2016). Both developments would favour Labour, but the party still had to increase its economic credibility to appeal to centrist voters; otherwise, so the argument went, Labour’s lead in the polls could crumble if it were attacked on its fiscal position. As a result, Labour shifted its economic position in June 2013 by way of coordinated speeches from Miliband and Balls. First, Ed Miliband (2013)

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gave a speech to activists at the Labour National Policy Forum in Birmingham in which he said: ‘our starting point for 2015–16 is that we won’t be able to reverse the cuts in day-to-day, current spending unless it is fully funded from savings elsewhere or extra revenue, not from more borrowing’. Moreover, he invoked the experience of Attlee’s post-war government and argued that Labour could be prudent with public finances while still implementing a radical economic programme. A few days later, Balls followed up on Miliband’s speech with a speech at Thomson Reuters. He argued: ‘we will inherit a substantial deficit. We will have to govern with much less money around. We will need to show an iron discipline’ (Balls, 2013b). Moreover, he promised: Labour will set out, in our general election manifesto, tough fiscal rules that the next Labour government will have to stick to—to get our country’s current budget back to balance and national debt on a downward path. Tough rules, which will be independently monitored by the Office for Budget Responsibility. (Balls, 2013b)

Therefore, in June 2013, austerity’s victory over Keynesianism was complete (Robert Skidelsky, personal interview, 25 April 2017). Although Balls denies that he ever advocated austerity (personal interview, 12 December 2016), Labour accepted the need for deficit reduction and the language of cuts. As Matthew D’Ancona (2013, p. 340) argues, ‘Osborne, of course, had missed his own targets and had been mocked for doing so. But he had defined the rules of the game, the terms of the debate’ (cited in Burton, 2016, p. 101). In the run-up to the general election of 2015, Miliband and Balls strengthened the party’s orthodox fiscal position in their quest for fiscal credibility. For example, in his speech to the Labour conference in September 2013, Balls argued: ‘in tough times it’s even more important that all our policies and commitment are properly costed and funded. The British people rightly want to know that the sums add up’ (Balls, 2013a). In January 2014, he then promised a binding fiscal commitment in his speech to a conference from the Fabian Society, announcing that ‘the next Labour government will balance the books and deliver a surplus on the current budget and falling national debt in the next Parliament’ (Balls, 2014b). Going into the 2015 election, the party’s headline measure on fiscal consolidation was that, if elected, it would balance the current budget and get public debt falling ‘as soon as possible’ in the next Parliament (Labour Party, 2015, p. 1). Labour planned to match Conservative spending plans for 2015– 16, pledged not to reverse key spending cuts, and assured the electorate that its manifesto did not contain any promises that would make additional

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borrowing for day-to-day spending necessary. The main difference between Labour and the Conservatives in the election campaign was one of timing: while the Conservatives promised to eliminate the deficit by 2018, Labour pledged to reduce it every year and to achieve a balanced budget by the end of the next Parliament. This was enshrined in a triple ‘budget responsibility lock’, which featured on the first page of Labour’s election manifesto. Labour still allowed for borrowing for capital (investment) spending, as opposed to borrowing for current (day-to-day) spending, but this policy was too complex to resonate with voters. According to Thomas Baldwin, ‘even half of the Shadow Cabinet did not understand our economic position’ (personal interview, 13 December 2016). Rather, the 2015 ‘budget responsibility lock’ manifested Labour’s return to fiscal prudence under Miliband and Balls.⁹

Discussion: electoral and ideational pressures for austerity in the UK The politics of austerity As the earlier sections demonstrate, Labour’s fiscal policies were strongly influenced by political factors. Following the economic crisis, the party faced an unfavourable environment in terms of public opinion. There was a perceived consensus among the British public that the government had to reduce its deficit and debt, but fiscal consolidation also spoke to the concerns that British citizens had over unfair redistribution to supposedly ‘undeserving groups’ (Stanley, 2016). Especially after the 2010 election, the newly elected Conservative–Lib Dem coalition government was able to effectively construe the crisis as the product of Labour’s fiscal profligacy and present its austerity programme as the appropriate policy. This proved to be an extremely effective strategy, creating a strong perception among voters that the coalition government’s austerity measures were largely Labour’s fault. The Labour leadership closely monitored this public-opinion environment. It regularly commissioned internal polls and focus groups, but also paid attention to public polls (Rachel Reeves, personal interview, 7 December 2016; Ed Balls, personal interview, 12 December 2016; Thomas Baldwin, personal interview, 13 December 2016). This was a legacy from the New Labour ⁹ Ed Balls still maintains that ‘there was a big gap between George Osborne and my plans in 2015’, and that this was not emphasized ahead of the election. He recalls: ‘I didn’t want the election campaign to be about relative fiscal plans. I didn’t think that this would be an argument that was easy to win’ (personal interview, 12 December 2016).

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era, which had seen a rise of pollsters and strategists to the centre of the party. These pollsters were still influential under the leadership of Brown and Miliband, but their arguments were also supported by the leaders’ personal experiences. For example, Miliband regularly spoke to people in his constituency or the park near his home in north London to inform his decisions, an exercise that he called ‘cruising the Hampstead Heath’ (Marc Stears, personal interview, 9 November 2016). Initially, some people within the Labour Party thought that public opinion would shift. For example, in his Bloomberg speech in 2010, Balls acknowledged polls that showed that the public was supportive of the spending cuts, but he also predicted that the public would become increasingly concerned ‘as the impact of deflation on jobs and the economy feeds through’ (Balls, 2010). Yet, over time, Labour came to believe that the consensus among the electorate was too strong to move (Rachel Reeves, personal interview, 7 December 2016; Marc Stears, personal interview, 9 November 2016). Miliband and Balls both shared a Keynesian outlook (Torsten Bell, personal interview, 13 December 2016), but they were concerned about Labour’s already weak economic credibility with the electorate. They did not want to present Labour as an anti-austerity party because they assumed that voters had an intrinsic scepticism towards government deficits. In Labour’s view, this scepticism was based on two pillars. First, the leadership believed that a significant portion of the public buys into the ‘household analogy’, which treats the public budget as analogous to that of a public household. In the UK, this household analogy had been popularized by Margaret Thatcher and had become rooted in ‘the everyday “common sense” that dominates discourses’ (Schmidt and Thatcher, 2013, p. 75). Moreover, Labour believed that ‘to the public, a deficit means that they have to pay higher taxes in the future’ (Roger Liddle, personal interview, 27 October 2016). Remembering the 1992 election, when Labour lost due to its ‘tax bombshell’ and the ‘double whammy’, the party was afraid of being portrayed as advocating ‘tax-and-spend’ policies. Believing that they could not explain Keynesianism to voters on the doorstep, Labour’s leadership yielded to the orthodox organizing assumption that deficits and debt are problematic. Labour was thus torn between its economic instincts and the pollsters: how could it reconcile its economic agenda with the prevailing public opinion? In the words of Ed Balls (personal interview, 12 December 2016), we had a political economy problem because it was just impossible to say that deficits at this scale will become permanent; that is just impossible for the public to deal with …For us to say that it was not a priority to get the deficit down was just killing us politically.

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Similar to the German case (see Chapter 7), the result was a political fudge: both in 2010 and 2015, the party tried to demonstrate that it was serious about the deficit but still maintain enough wiggle room to be able to implement (investment) spending should it win the election. According to Marc Stears, however, in 2015, this was nothing more than ‘an attempt to avoid the debate because, in reality, the two Eds believed that they could spend more’ (personal interview, 9 November 2016). In both instances, in 2010 and 2015, this fudge was driven by the electoral cycle. When Brown became the leader of the Labour Party in 2007, he shied away from calling an early election. Eventually, however, he became concerned about his place in history as an unelected Prime Minister, should he lose the 2010 election. He listened carefully to pollsters and was ready to put politics first. Similarly, Ed Miliband was driven by the imperative to win the election in 2015. Labour politicians and advisers of his generation had been used to being in government and they had an instrumental approach to politics: they were driven by the desire to get back into power in 2015 and reclaim their ‘place in the sun’. Electoral considerations, therefore, influenced their decisions at every turn over the parliamentary term. After Labour gained a poll lead in 2012, the leadership became very risk-averse and shied away from radical economic positions (John Denham, personal interview, 24 April 2017). Although Miliband had begun to spell out such ideas at the beginning of his tenure as party leader, he lacked the conviction to follow up on them. Jon Cruddas, who was Policy Coordinator under Miliband, emphasized that ‘many people still had more radical ideas but they were marginalized by the pollsters. The idea that you had to play it safe dominated as the electoral instincts kicked back in’ (personal interview, 5 December 2016). The argument by the pollsters was especially forceful within the Labour Party because the party’s brand had been tarnished by its past. In comparison to the Conservatives, Labour was less trusted to run the economy for most of the twentieth century. In particular, the memory of the IMF crisis in 1976 and the Winter of Discontent had undermined its claim to economic expertise. The ERM crisis in 1992 under a Conservative government helped in this regard, as it undermined the Conservative line of attack. But the problem became acute again in the shadow of the Great Recession. Labour took a great deal of blame for the crisis, which had occurred under its watch, and never forcefully rejected claims that its ‘fiscal profligacy’ had created Britain’s economic mess. Marc Stears argued that the messenger was key: ‘People might have been open to arguments about Keynesian demand stimulus, but they were unwilling to hear about this from Labour’ (personal interview, 9 November 2016).

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In its quest for fiscal credibility, the Labour Party took a page out of New Labour’s playbook. The historic victory in 1997 had shown, so the argument went, that Labour first had to establish its credibility before it could set out its own economic agenda (Kieren Walters, personal interview, 8 November 2016; Rachel Reeves, personal interview, 7 December 2016). This thinking was deeply ‘ingrained within the mindset’ (Jon Cruddas, personal interview, 5 December 2016) of the Labour leadership and it guided their response to the crisis. Based on the idea that ‘once you have lost credibility, you have to go further to re-establish it than you might want to’ (Patrick Diamond, personal interview, 25 October 2016), they shelved their more radical economic ideas. Miliband and Balls essentially ‘decided that if [Labour] was to have a chance of winning the election, [we] had to put the politics first’ (Ed Balls, personal interview, 12 December 2016). Influenced by the experience of the 1990s, the party believed that it could only gain power by increasing its economic credibility (Marc Stears, personal interview, 9 September 2016; Thomas Baldwin, personal interview, 13 December 2016). In the context of Britain’s first-past-the-post electoral system, Labour shifted towards the right and accepted fiscal orthodoxy to woo centrist voters. As Ed Balls argued, the only reason that I ran an argument about deficit reduction was that I thought this was necessary to win the centre, the centre-left voters. The centre-left was never willing to listen to a big expansionary argument from Labour …they thought that the deficit was a big deal. (personal interview, 12 December 2016)

Still, these arguments did not have the desired effect, as Labour’s fiscal credibility remained weak. There were several slip-ups that showed that Labour was not fully convinced by the need for austerity. For example, Ed Miliband forgot to mention the deficit in his speech at the Labour conference in September 2014, an omission which was heavily mocked by the media and his political opponents. Moreover, many people within the party remained sceptical and repeatedly criticized the leadership. This exposed the inconsistencies within Labour’s platform: although Miliband had yielded to the language of cuts and prudence, he still maintained other left-wing economic ideas. But how should a government help the ‘squeezed middle’ and address the ‘cost-of-living crisis’, while continuing to cut spending? Miliband tried to argue that Labour was for ‘big reform, not big spending’, but this argument was not very effective. As the party tried to reconcile its different objectives, it had to square too many circles.

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The economics of austerity The political arguments for austerity were combined with economic arguments.1⁰ Within the Labour Party, there was a real belief that rapid deficit reduction was necessary because the UK’s weak macroeconomic position made it liable to further damage if a new exogenous shock were to hit the economy. However, as shown in Figure 6.7, the interest rates on the UK’s short- and long-term bonds remained relatively low in the context of the crisis. In fact, during the crisis, the UK benefited from its status as a ‘safe haven’, as investors were looking to limit their exposure to risky assets in the context of the financial crisis. The UK government had never defaulted on its obligations and the government issued bonds with a relatively long duration compared to those of other governments. This made UK government bonds attractive for investment in the context of market turbulence, as the risk of default was essentially non-existent. The Labour government knew this, and former Chancellor Alistair Darling (2011, p. 179) argued that the government was ‘never at any time at risk of being unable to raise the money that was needed’.

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2000 Year

Figure 6.7 UK interest rates on government bonds, 1960–2015 Note: The figure shows the long- and short-term interest rates at which UK government bonds were traded on financial markets. They are the average of daily rates, measured as a percentage. Long-term interest rates refer to government bonds maturing in ten years; short-term interest rates usually refer to three-month money market rates. Source: OECD.

1⁰ This section partly draws on an article written jointly with Sean McDaniel that was published in the Socio-Economic Review (Bremer and McDaniel, 2020).

Discussion: electoral and ideational pressures

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Still, irrespective of a hypothesized new economic shock, policymakers believed that the deficit was simply too high and needed to be brought down. In the first phase, when the party was in government, domestic and international institutions strongly shaped this perception. In 2009, both the Treasury and the Bank of England argued that the deficit had become unsustainable and encouraged reductions in government spending. Labour had been in power for eleven years, but after the financial crisis, the old ‘Treasury view’ resurfaced. Even civil servants that had previously worked closely with Gordon Brown lost their faith in New Labour policies (Seldon, 2011, p. 255), arguing against his Keynesian instincts. This was compounded by external pressure from other institutions. For example, in March 2009, the Governor of the Bank of England Mervyn King intervened by saying that ‘we are confronted with a situation where the scale of deficits is truly extraordinary’ (Stewart and Seager, 2009). Over time, international institutions like the IMF and the Organisation for Economic Co-operation and Development (OECD) joined these sceptical voices and called for less government stimulus. In 2009, this contributed to a discursive environment whereby Labour’s shift towards fiscal consolidation became more likely (Robert Skidelsky, personal interview, 25 April 2017). In opposition, the party initially had a very ambiguous policy, as described earlier. Simon Wren-Lewis argues (personal e-mail, 10 October 2016) that this was partly because Labour did not get the economics clear. There was no lack of alternative ideas among British economists when the coalition government implemented austerity and certainly, there was no consensus among economists that austerity was the right economic policy. However, after the economy started to grow again in 2013, the belief that the deficit had to be brought down was widespread among Labour policymakers (e.g. Nick Pearce, personal interview, 3 December 2016). This adjustment had to be achieved via austerity measures because, in those policymakers’ opinion, there was no stimulus available that would yield a multiplier effect large enough to bring down the deficit by itself. Underlying this position was a more restricted conception of the output gap and the new potential of the UK economy (Rachel Reeves, personal interview, 7 December 2016), consistent with the New Keynesian theoretical framework (and similar to the German case discussed in Chapter 7). As argued earlier, leading Labour politicians believed that the economic crisis and Osborne’s austerity programme had effectively resulted in a negative supply shock (Ed Balls, personal interview, 12 December 2016). As the economy returned to a diminished economic trend, the output gap closed, and Labour saw less urgency in stimulating demand. Indeed, Balls (2012) sought to explicitly differentiate the theoretical

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underpinning of his arguments from those of people that he called ‘naïve Keynesians’. Labour’s position was also shaped by the austerity programme that the government implemented. A large share of the successive cuts fell on local governments, who were able to limit the effects of austerity. They cut the services that were the least protected and limited the damage on frontline services (Burton, 2016, p. 34). As a result, austerity was initially felt by fewer people than one might have expected. Moreover, over time, the government began to ease the spending cuts. Osborne became worried about the economic conditions in the UK and adjusted the government’s fiscal path.11 In combination with QE carried out by the Bank of England, this limited the impact of austerity on the British economy. Beginning in 2013, the British economy actually began to grow again and throughout the crisis, the headline figure of unemployment remained relatively stable compared to other countries. This made Labour’s initial warning that austerity would lead to a ‘lost decade’ seem hollow and undermined the party’s ability to vigorously oppose the government’s plans. The perceived superiority of monetary policy over fiscal policy in managing the economy also plays a role in this story. As an influential economic adviser to Brown in the 1990s, Balls was the leading voice in pushing for New Labour’s decision to grant independence to the Bank of England. This was an attempt to bolster New Labour’s credibility with financial markets (Keegan, 2004, p. 153), but it also reflected New Keynesian ideas that an independent, technocratic central bank could most effectively respond to economic crises (Carstensen and Matthijs, 2018; Matthijs, 2011, pp. 140–77). As the Bank of England implemented a massive QE programme from March 2009 onwards, the leading voices increasingly thought that fiscal policy should take second place. A debate came up within the Labour Shadow Cabinet over whether QE should run through the financial system (by making it easier for banks to lend) or whether a more direct fiscal or investment-led stimulus was required (John Denham, personal interview, 21 April 2017). Ideas for a more radical version of QE gained some traction but, ultimately, this debate never attained much ground within the party under Miliband’s leadership, and the dominance of monetary policy was not questioned. The party leadership still insisted on maintaining the need for additional investment spending, but there was a feeling that there was a lack of shovel-ready projects which could quickly support growth and produce a counter-cyclical fiscal policy effect. 11 According to one of his biographers, Osborne lost intellectual confidence in the expansionary fiscal consolidation thesis in 2011 and 2012 (Ganesh, 2012).

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Alongside this, there is also evidence of the ‘progressive consolidation thesis’ (Haffert and Mehrtens, 2015). Led by New Labour politicians and activists, the argument that fiscal conservatism and social justice go hand in hand gathered momentum during the parliamentary term. This type of argument underpinned what Balls came to term ‘fiscal responsibility in the national interest’ (e.g. Balls, 2014a). It meant committing to policies such as devoting all windfall gains from the sale of bank shares to repaying the national debt burden and holding a ‘zero-based review’ of spending, ‘examining every pound spent by the government to cut out waste and make different choices’ (Balls, 2014b). Underlying this approach was a concern with the size of the UK’s public debt and the associated interest payments. In fact, the missing section of his 2014 party conference speech that Miliband (2014) forgot to include (mentioned earlier) stated: ‘there won’t be money to spend after the next election. Britain will be spending £75 billion on the interest on our debt alone. That’s more than the entire budget for our schools.’ Consistent with supply-side Keynesianism, the concept of fiscal responsibility in the national interest linked the decision to pursue debt with the promise of a renewed fiscal capacity to pursue progressive ends in the future. Still, part and parcel of Labour’s approach was an attempt to differentiate its own plans from Conservative plans for consolidation by demonstrating how it could once again enable the state to act in the interests of growth and prosperity. According to Marc Stears, there was a general agreement within the leadership that Labour could not tie its hands too much concerning investment (personal interview, 9 November 2016). Influenced by supply-side ideas and the social investment paradigm, the party believed that investment in skills and education would be central to improving productivity and spurring growth in the British economy. Therefore, the party gave itself some financial leeway for capital spending, but this was not based on arguments for straightforward demand management.

Labour trapped and divided Labour’s struggle to develop a clear fiscal policy was made worse by the legacy of the Third Way, which trapped and divided the party. Initially, the Third Way had successfully expanded Labour’s cross-class electoral coalition by attracting centrist voters. After the financial crisis, however, the electoral coalition broke apart: while centre-left voters lost faith in Labour’s ability to manage the economy, the working class was alienated by the Third Way. Consequently, the party was pulled in different directions: Britain’s

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first-past-the-post electoral system drew Labour towards fiscal prudence, but austerity was against the interests of some of Labour’s traditional constituencies. The party was deeply divided over how to respond to this (Patrick Diamond, personal interview, 25 October 2016; Thomas Baldwin, personal interview, 13 December 2016; John Denham, personal interview, 24 April 2017). On the one hand, there was a significant segment of the Labour movement which opposed austerity. In particular, the trade unions vigorously campaigned against the coalition’s cuts and led some of the largest antiausterity protests. For example, on 26 March 2011, the TUC organized a protest in London called ‘March for the Alternative’, which attracted more than 250,000 people. The left wing of the Labour Party and many of the party’s members were involved in these protests, and even Ed Miliband addressed the crowd. Moreover, in February 2013, prominent members of the Labour Party launched the ‘People’s Assembly Against Austerity’; they included Tony Benn, Jeremy Corbyn, John McDonnell, and Katy Clark, as well as the leader of the largest British trade union, Len McCluskey. The assembly was launched with an open letter in The Guardian; its aim was to bring ‘together campaigns against cuts and privatisation with trade unionists in a movement for social justice’ (People’s Assembly Against Austerity, 2013). On the other hand, a different faction within the Labour Party took a radically different view. This position was best expressed in a discussion paper by the Policy Network, written by Graeme Cooke, Adam Lent, Anthony Painter, and Hopi Sen (2011) and titled ‘In the Black Labour’. The authors argued that the Labour Party would need to ensure long-term fiscal sustainability while trying to ‘advance centre-left goals in the context of limited resources through clear and bold reforms’ (Cooke et al., 2011, p. 3). They emphasized that there was less money to go around, and that social justice could not be achieved through higher government spending but only ‘through prioritisation, institutional innovation, and reform’ (Cooke et al., 2011, p. 4). This view was shared by influential MPs from New Labour, but it was not the dominant view within the Labour Party, as one of the original authors of the discussion paper recounted (Anthony Painter, phone interview, 2 December 2016). The divisions within the Labour Party made the leadership’s task more difficult. Brown was already struggling to hold the party together and his position was severely weakened by attacks from inside the party. The challenge of holding the Labour Party together became even greater after 2010, when Ed Miliband was elected its leader in a divisive leadership contest. Not only did he oppose his own brother, but the election was also seen as a fight for the future of the Labour Party by the followers of Blair and Brown. Ed

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Miliband was well aware that his party had often slid into bitter internal conflict after previous electoral defeats (e.g. in the 1950s, the 1970s, and the early 1980s), and he was adamant that he had to avoid such conflict if he wanted to have a chance of winning the next election (Marc Stears, personal interview, 9 November 2016). Yet, unity came at the cost of direction. Although Miliband was elected with the help of the trade unions on a left-wing platform, he could not distance himself from the Third Way because his cabinet and the backbenches were full of New Labour politicians (Marc Stears, personal interview, 9 November 2016; Thomas Baldwin, personal interview, 13 December 2016). As a result, Jon Cruddas (personal interview, 5 December 2016) admits that ‘it would have been difficult to promote radical policies among the divisions in the party’, and Miliband—like Brown before him—was forced to paper over the cracks within Labour. It is, therefore, unsurprising that the resulting compromise was influenced by the party’s previous policies, i.e. that there was a significant amount of path dependency in both electoral and ideational terms. Leading figures within the party had supported and, to a certain extent, even developed New Labour’s economic policies, and they found it very difficult to distance themselves from them. Ed Miliband opened up space within the party for the discussion of new ideas, but he lacked the necessary power and resources to initiate a wholehearted paradigm change. He was surrounded by people who had supported Labour’s Third Way, while more radical voices continued to be marginalized within the Labour Party until 2015. Moreover, influenced by New Labour’s experience, the party leadership prioritized tactical considerations over new economic arguments. Concerned about Labour’s weak economic credibility among voters, they responded to short-term electoral concerns and relied heavily on public opinion research to design their policies. Borrowing from New Labour’s playbook, they tried to appeal to fiscally conservative voters in Britain’s political centre ground. These voters had become very sceptical about Labour’s economic competence since the party’s presiding over the greatest financial crisis since the Great Depression and, according to the view that was dominant within the leadership, the party would have to go a long way to regain their trust.

Conclusion The Great Recession, and the ensuing debate about how to respond to it, threw Labour into a deep identity crisis. In 2008, Gordon Brown saved the financial system, reflated the economy, and orchestrated a global stimulus

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in the spirit of John Maynard Keynes. Labour became the victim of its own policies’ success, however: once these policies had prevented the recession from turning into a depression, public discourse became increasingly concerned with the public deficit rather than the lack of aggregate demand. Even in Britain, where external pressures for austerity did not exist, the crisis was hence turned into a ‘crisis of debt’ rather than a ‘crisis of growth’, and Labour took the blame for it. The need to re-establish its fiscal credibility haunted the Labour Party in the following years and strongly influenced the presentation of its economic policies after 2008. Like other social democratic parties, Labour faced a dilemma: if the party were to oppose austerity, it would appear ignorant about the deficit; if it were to accept austerity, it would risk betraying its own instincts and traditional constituents. Put differently, Labour’s head and heart were pulling it in different directions: while its head was telling the party to speak the language of fiscal prudence, its heart wanted to oppose austerity. In the end, the party decided that it had to get the politics right before it could implement other economic policies. It attempted to dilute its economic programme and appeal to fiscally conservative voters in the political centre. Although this approach had worked in the mid-1990s, it failed in the context of the recent economic crisis. The party lost its reputation for economic competence in the wake of the 2007–8 financial crisis and was not able to close the ‘credibility gap’ with the Conservatives thereafter. The latter were viewed as more competent in dealing with the deficit, as they had used a great deal of clever messaging to discredit the Labour Party. For example, they argued that voters should not ‘give the keys back to the people that crashed the car’ and that the coalition government had to ‘clean up Labour’s mess’ and was ‘fixing the roof while the sun was shining’. Eventually, Labour adopted a line of defence that accepted austerity as a necessary evil, committing itself to orthodox fiscal policies. However, this strategy backfired: by speaking the language of cuts, Labour gave fiscally conservative voters in the centre a reason to vote Conservative. Although Brown and Miliband may not have won the elections in 2010 and 2015 if they had opposed austerity either, Labour’s orthodox fiscal policies turned fiscal consolidation into a valence issue in the UK, and this played into the hands of the Tories, who owned the issue. At the same time, Labour disappointed many of its core supporters, including the trade unions, which campaigned fiercely against austerity. The Scottish National Party (SNP) and the Green Party, both of which campaigned against austerity, became popular among left-wing voters. Within the Labour

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Party a growing gulf opened up between the Parliamentary Labour Party (PLP) on one side and Labour’s members and activists on the other. While Labour’s leadership adopted positions that they not only deemed necessary to win elections but also justified with reference to their economic ideas, a large share of the party’s members were longing for an anti-austerity programme. Many members of the PLP had ‘underestimated the extent to which Labour members and Labour voters could become disconnected’ (Ed Balls, personal interview, 12 December 2016). Eventually, Labour’s struggle over the right fiscal policy also set the stage for the internal conflict that broke out after the 2015 election. Jeremy Corbyn ran as the candidate of the far left in Labour’s leadership election. He presented himself as the anti-austerity candidate and was greeted with a large amount of enthusiasm by the party’s members and supporters. This showed how passionately the party’s members had been longing for an alternative to austerity, and in the end, he easily defeated the other candidates in the leadership election (Quinn, 2016). His victory led to a bitter intraparty conflict, which culminated in an attempted coup by a significant number of MPs after the Brexit referendum in 2016. Corbyn, however, survived the coup and won a second leadership election against Owen Smith in the summer of 2016. Afterwards, Corbyn was able to strengthen his position within the Labour Party, cementing it with the 2017 electoral campaign. During this campaign, Jeremy Corbyn and his Shadow Chancellor John McDonnell still adhered to a ‘fiscal credibility rule’—a fiscal policy that Ed Balls (2016) claims is not much different to his own—but they managed to present the party as ‘anti-austerity’. The party supported many distinctively social democratic economic policies that became popular among the public (e.g. NHS funding, rail nationalization, abolition of university fees). Seven years after the Conservatives had begun implementing austerity, Corbyn still lost the election but his rhetoric helped Labour to win back votes. Following his second election loss in 2019, after a campaign which had been dominated by discussions about Brexit, Corbyn resigned from the leadership. Afterwards, the pendulum swung back towards the centre with the election of Keir Starmer as the new leader of the Labour Party, but Corbyn had still managed to pull off something that the party had struggled to do ever since 2008: to question the conservatism of British economic discourse and to move it onto a more favourable ground for Labour. By the time of the COVID-19 outbreak, austerity had become markedly less popular in public discourse, which also made Starmer’s life easier.

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Appendix: list of all British interviews I selected my interview partners by combining a ‘purposive sampling method with a ‘chain’ or ‘snowballing’ sampling method. I first tried to identify the key politicians and policymakers that influenced the response of Labour to the Great Recession. Second, I encouraged my initial respondents to suggest other people relevant to answer my research question. In this way, I tried to identify influential players, who were not obvious ex ante. Based on this reasoning, I conducted interviews between September 2016 and April 2017 with the twenty policymakers listed below. The list includes their most relevant position(s) during the period that this book focuses on (2008–15): • Anonymous, former Labour MP and Minister, London, • Thomas Baldwin, former adviser to Ed Miliband, London • Ed Balls, former Minister and Shadow Chancellor of the Exchequer, London • Torsten Bell, former senior strategic advisor to Ed Miliband, London • Dan Corry, former Head of the Number 10 Policy Unit, London • Jon Cruddas MP, Labour Party MP and Policy Coordinator under Ed Miliband, London • Alistair Darling, former Chancellor of the Exchequer, London • John Denham, former Labour MP, Government Minister, Shadow Business Secretary and Parliamentary Private Secretary to Ed Miliband, Winchester • Patrick Diamond, former senior adviser to Tony Blair and Gordon Brown, London • Peter Hain, Lord and former Labour MP and government minister, London • Neil Kinnock, Lord, former Leader of the Labour Party, London • Roger Liddle, Lord, former special adviser to Tony Blair, London • Anthony Painter, Labour activist and author of ‘In the Black Labour’ (phone interview) • Nick Pearce, former director of the Institute for Public Policy Research, London • Rachel Reeves, Labour MP and senior member of Labour Party Shadow Cabinet under Ed Miliband, London • Robert Skidelsky, member of the House of Lords and economic historian, London

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• Marc Stears, former strategic advisor to Ed Miliband, London • Nick Thomas-Symonds MP, Labour MP for Torfaen and Historian, London • Kieren Walters, former Head of Broadcasting for the Labour Party, London • Simon Wren-Lewis, Emeritus Professor of Economics and Fellow of Merton College, University of Oxford (e-mail exchange)

7 The Fiscal Policies of the German SPD in Times of Crisis The Swabian Housewife of the Left?

Introduction The SPD has played a key role in economic policymaking in Germany during the past two decades.1 Except for four years it has always been a coalition partner in the federal government since 1998, and the party is best known for implementing a set of liberal labour- and welfare-market reforms known as ‘Agenda 2010’. These reforms undermined the social profile of the SPD and contributed to the rise of the far-left party Die Linke (Schwander and Manow, 2017). Nonetheless, the SPD was also in government for quite some time in the wake of the financial crisis, albeit as a junior partner in a grand coalition with Angela Merkel’s Christian Democrats (the CDU) and their Bavarian sister party the Christian Social Union (the CSU). During this time, the SPD supported economic policies that are difficult to reconcile with each other. At the beginning of the crisis, the SPD bailed out the German financial system and implemented two large stimulus packages, actions which had a distinctly Keynesian flavour. However, at the same time, the SPD supported the introduction of a constitutional debt brake (Schuldenbremse), limiting the amount of debt that Germany’s federal and state governments were allowed to issue. In this way, it accepted an important cornerstone of economic orthodoxy which would come to dominate Europe in the following years. Even when the SPD was out of government from 2009 to 2013, the party accepted austerity as the dogma of the day. It was complicit in imposing austerity on crisis-ridden debtor countries abroad and supported the rigid budgetary fiscal policy (Schwarze Null) that the conservative finance minister Wolfgang Schäuble implemented at home.

1 This chapter builds and expands upon a paper published in German Politics (Bremer 2020). Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0007

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This chapter attempts to explain why the SPD supported fiscal consolidation during the Great Recession. To examine the fiscal policies of the SPD in response to the crisis, the chapter again combines a quantitative content analysis of election campaigns from before and after the financial crisis with a qualitative case study. The quantitative content analysis shows that the SPD attempted to shift its position on the welfare state and economic liberalism to the left, but that it remained wedded to fiscally orthodox policies in response to the crisis. To explain this puzzling outcome, I again use process tracing. The analysis is mainly based on insights from twenty-one elite interviews with SPD politicians and policymakers, which I complement with evidence from official documents and public statements made by leading social democratic politicians. The interviews allow me to unpack the official narrative that the SPD used to justify fiscal consolidation after 2009 and to elucidate the causal mechanisms behind the party’s response to the Great Recession. Based on this analysis, I argue that the policies of the SPD, like those of the UK’s Labour Party during the same period (Chapter 6), were driven by strategic calculations and lingering economic ideas. On the one hand, the SPD perceived voters as fiscal conservatives who expected the government to balance its budget and reduce government debt. Government deficits and debt already had a bad reputation in Germany’s economic discourse before the crisis and, therefore, the SPD attempted to signal fiscal competence by supporting fiscal consolidation. On the other hand, the SPD remained influenced by New Keynesianism and supply-side economics, which had shaped its programme before the crisis. Due to the perceived success of Agenda 2010, these ideas were particularly prevalent in Germany. They pushed centrist SPD politicians away from traditional Keynesian thinking and served to legitimize fiscal orthodoxy among the centre-left, even more so than in the UK. Still, Agenda 2010 had also caused a political rift within the SPD, which had shaped the party’s crisis response. The reforms were controversial within the party, undermined its ties with the trade unions, and blurred its political profile. Weakened by these internal conflicts, the party lacked a clear economic paradigm and was unwilling to challenge the prevailing economic discourse in Germany, which was still strongly influenced by ordoliberalism (e.g. Blyth, 2013; Woodruff, 2016) and a moral view on the economy (Hien, 2019; Schulze-Cleven and Weishaupt, 2015). In this context, the SPD embraced the ‘progressive consolidation thesis’ (Haffert and Mehrtens, 2015); this decision on their part helped to entrench fiscal orthodoxy in Europe. To make this argument, the chapter follows the same outline as that of Chapter 6. First, I briefly review the fiscal policies that the SPD has historically espoused. This analysis will necessarily be incomplete, but it is helpful

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in order to contextualize the fiscal policies that the party adopted in response to the economic crisis. Second, I use the data set from Chapter 3 again to analyse the response of the SPD to the economic crisis before I explain this response by way of process tracing. This analysis distinguishes four different periods in the SPD’s response to the Great Recession and pays close attention to the nature and timings of policy shifts. It first attempts to reconcile the SPD’s decision to support demand stimulus as well as the Schuldenbremse in response to the financial crisis. Afterwards, it explains the fiscal policies that the SPD proposed from 2009 to 2015 during the eurozone crisis, when the SPD was first in opposition (2009–13) before it returned to government (in 2013). Finally, I discuss the implications of the analysis, focusing on the economics and politics of austerity.

The SPD’s fiscal policies before the Great Recession From Marxism to Keynesianism: 1945–74 The SPD had a complicated relationship with fiscal policy in the twentieth century. Unlike other European social democratic parties, it did not enthusiastically embrace Keynesianism after the Second World War. At the beginning of the postwar era, the SPD was still inspired by the Marxist ideas that had shaped the party in the previous decades (Berman, 1998). The party initially remained in favour of an interventionist approach and focused on supply-side policies that opposed the free market such as nationalization, planning, and worker control (Allen, 1989, p. 273). However, in 1959, the SPD made a programmatic reversal. By adopting the Godesberger programme, the party turned away from Marxism and openly embraced Keynesianism (e.g. Held, 1982; Przeworski, 1985, p. 32). It accepted the basic logic of the free market and embraced a Keynesian economic programme similar to those of other European social democratic parties. Like other centre-left parties in Europe, the party discovered Keynesianism as a theoretical justification for policies that pursued social democratic ideas (like social justice and solidarity) based on economic arguments. Afterwards, the party became a vocal supporter of Keynesianism, and this endeavour was led by Karl Schiller, a leading German economics professor. Labour unions soon followed suit, and in 1963, the German Trade Union Confederation (DGB) adopted a general programme that was inspired by Keynesianism. This programmatic reversion in the late 1950s and early 1960s was electorally successful (Allen, 1989; Walter, 2002, p. 185) and the SPD was able to

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put its programme into practice after its first entry into the federal government in the postwar era in 1966. It joined the CDU/CSU in a grand coalition, and Karl Schiller became finance minister. He responded to the economic crisis of 1966 and 1967 with a Keynesian stimulus programme and codified Keynesianism into German law by passing the so-called ‘Stabilitäts- und Wachstumsgesetz’ (Nützenadel, 2005, p. 123ff). The law recognized the government’s responsibility for employment and mandated it to act accordingly. Afterwards, in 1969, the grand coalition also changed the constitutional debt rule. The Constitution now read that ‘the receipts from loans shall not exceed the sum of the planned expenditure on investments in the budget; exceptions are only permissible to prevent a disturbance of the macroeconomic balance’ (Law to change the German Constitution from 2 May 1969, BGB1. I, S. 357).2 These changes ushered in a brief period of Keynesianism in Germany, which persisted during the grand coalition (1966–9) and the centre-left government under Willy Brandt (1969–74). During this time, the government used active demand management to stabilize the economy, following the example of other Western European administrations.

From Schmidt to Schröder: 1974–99 In 1974, Helmut Schmidt took over from Willy Brandt and became the second SPD chancellor of the postwar era. Although Schmidt famously said in 1972 that he would prefer 5 per cent inflation over 5 per cent unemployment, he was more concerned with economic stability than most other social democrats. He was not a follower of ordoliberalism, which he regarded as ‘too technocratic and arrogant’ according to Dyson and Featherstone (1999, p. 288), but, in the context of stagflation, he favoured more conservative policies than his predecessor; indeed, he used his first address to the Bundestag as chancellor to ‘repel all exaggerated [budget] demands’. He said that his government would use ‘all constitutional and political possibilities to commit the federal Länder and local governments to a thrifty spending policy from 1975 onwards’ (Schmidt, 1974, p. 20).3 Still, Schmidt was pressured by the left wing of his party, and by US President Jimmy Carter, to stimulate the economy in the late 1970s. The latter wanted Germany to become the economic locomotive for Europe and the 2 Author’s translation; original: ‘Die Einnahmen aus Krediten dürfen die Summe der im Haushaltsplan veranschlagten Ausgaben für Investitionen nicht überschreiten; Ausnahmen sind nur zulässig zur Abwehr einer Störung des gesamtwirtschaftlichen Gleichgewichts.’ 3 Author’s translation; original: ‘Die Bundesregierung wird alle verfassungsmäßigen und alle politischen Möglichkeiten voll nutzen, um Bund, Länder und Gemeinden auf eine sparsame Ausgabenpolitik ab 1975 zu verpflichten.’

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rest of the world, and Schmidt partially conceded (Allen, 1989, p. 279). He implemented two stimulus programmes in 1977 and 1978 worth 29.3 billion Deutsche Mark and even risked a falling-out with his liberal coalition partner, the Free Democratic Party (FDP). However, the stimulus packages failed to have the desired effect. The autonomy of the central bank, as well as procyclical deficit reductions at the state and local level, undermined Keynesian demand management (Scharpf, 1991, p. 239), and eventually, Schmidt turned away from deficit spending. He tried to consolidate the budget and introduced welfare-state cuts. Yet, Schmidt faced opposition from left and right: while the left wing of his own party opposed spending cuts, his coalition partner, the FDP, began to embrace a monetarist policy. Schmidt tried to reconcile these opposing tendencies, but in 1982 the coalition government fell apart, despite his balancing act. After 1982, the SPD remained in opposition for sixteen years. The party initially remained wedded to some form of Keynesianism, even if it was more open to supply-side policies than other social democratic parties (Allen, 1989, p. 273). In the late 1980s and the early 1990s, the SPD became increasingly divided between the so-called ‘traditionalists’ and the ‘modernizers’, but the party’s direction of travel was still not clear after it won the election in 1998. There was a programmatic dualism personified by the difference between Gerhard Schröder, the chancellor, and Oskar Lafontaine, the party leader and finance minister (Nachtwey, 2013, p. 238). This dualism turned into an open conflict, which culminated in the resignation of Lafontaine in March 1999, having only served in government for 163 days. Subsequently, the modernizers took control of most of the levers of government (and the party) and initiated a reform process.

Germany’s Third Way: 1999–2008 Following Lafontaine’s resignation, Schröder appointed Hans Eichel as the new finance minister. Eichel was concerned with the sustainability of government debt and favoured more orthodox fiscal policies. Even in the context of Germany’s economic crisis in the early 2000s, when Germany was widely referred to as the ‘sick man of the euro’ (The Economist, 1999), Eichel continued to implement a restrictive fiscal policy. Moreover, Chancellor Schröder attempted to engineer a broader push for reforms. He published a joint paper with Tony Blair, the British prime minister and leader of the Labour Party, in which they laid out the rationale for a new economic programme (Blair and Schröder, 1999). Although Schröder and Blair stressed that they considered demand- and supply-side policies to be complementary, the paper

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is mostly remembered for outlining a new centrist economic strategy for social democratic parties in Europe that focused on supply-side reforms to stimulate economic growth. Despite the initial push by the modernizers to rejuvenate Germany’s economy, the SPD-led government struggled to implement far-reaching reforms based on a corporatist strategy, i.e. an alliance for jobs based on a collaboration between trade union representatives and employers. The so-called ‘Bündnis für Arbeit, Ausbildung und Wettbewerbsfähigkeit’ was created in 1998 after Schröder was first elected, but it eventually failed in the early 2000s. Before the 2002 elections, Schröder therefore created the ‘Hartz Commission’, with the task of developing recommendations for labour-market reform. After the red-green government was narrowly re-elected, Schröder intensified the push for reforms and eventually opted for a post-corporatist strategy (Nachtwey, 2013, p. 240). He announced Agenda 2010 in March 2003, implementing a set of reforms that liberalized the labour market and the welfare state. The reforms were politically contested; they are often seen as a significant reorientation of Germany’s welfare state (Hassel and Schiller, 2010; Hegelich et al., 2011). They liberalized Germany’s labour markets and system of welfare provision and had far-reaching political consequences (Schwander and Manow, 2017). The policies were unpopular among a large share of the SPD’s voters and party members, creating a lot of political discontent in the mid2000s. Still, there is no single dominant interpretation of the transformation that the SPD underwent at the turn of the century. Seeleib-Kaiser (2002) argues that the SPD converged with the Christian Democratic Union (CDU), while Merkel et al. (2008) argue that the SPD still stands for a form of ‘traditional social democracy’. In contrast, Nachtwey (2013) suggests that the SPD has undergone a process of adaptive self-transformation and now has a distinct model that he calls ‘market social democracy’. These different interpretations of the SPD’s economic programme also emerged because the SPD retreated from fiscal orthodoxy while implementing Agenda 2010. Although Eichel remained in favour of restrictive fiscal policies and aimed at a balanced budget, Schröder ordered him to do otherwise. The chancellor was less concerned with the deficit and level of government debt; rather, he wanted to combine his liberal economic reforms with public investment in education and childcare. As a result, Schröder actively pushed his finance minister to increase the government deficit.⁴ In ⁴ In the coalition negotiations of 2002, Schröder allegedly said to Eichel ‘Hans, just leave it’ (Hans, lass mal gut sein) when the finance minister demanded further cuts.

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2004, the federal government incurred the largest deficit in the postwar era and the German government issued an extra €144 billion debt from 1998 to 2005. Germany even repeatedly broke the Maastricht criteria by running a budget deficit larger than 3 per cent of its GDP; along with France, it was the first country to do so. The party defended its stance as an appropriate countercyclical economic policy, and the SPD-led government pushed for a controversial reform of the Stability and Growth Pact (SGP). German representatives in Brussels argued that the European rules enshrined in the Maastricht treaty were too rigid and, in spring 2005, the European Council agreed to reforms that relaxed the SGP. The SPD was, therefore, instrumental in pushing for a fiscal framework that allowed for more fiscal flexibility in Europe before the economic crisis. While budget consolidation became an end in and of itself for social democratic parties in other countries like Sweden and the Netherlands, the German SPD did not prioritize fiscal consolidation (Merkel et al., 2008). Although Eichel and other leading social democrats were already concerned with the sustainability of Germany’s government debt in the early 2000s, the party considered other economic objectives and policies to be more important at that time. Consequently, it did not embrace spending limits and fiscal consolidation in the early 2000s and, against this background, it remains puzzling why it abandoned this position during the Great Recession.

Economic crisis and the response of the SPD The SPD remained in government until 2009, despite the electoral consequences of Agenda 2010. It lost the election in 2005, but the CDU/CSU and the FDP fell short of a majority. The SPD thus joined a grand coalition under the leadership of Angela Merkel, which was governing Germany when the financial crisis hit the advanced economies. After the fall of the American investment bank Lehman Brothers in September 2008, several German banks were on the brink of bankruptcy. Moreover, the financial crisis also led to the deepest recession since the Great Depression and Germany’s economy shrank dramatically in 2009 (Figure 7.1). Although Germany’s domestic economy recovered relatively quickly from 2010 onwards, the German government remained in crisis mode for several years because the eurozone crisis retained a tight grip on continental Europe. To examine the SPD’s response to this economic crisis, I use the data from Chapter 3. Repeating the exercise from Chapter 6 for Germany enables me to put the SPD’s economic response to the Great Recession into historical perspective. To focus on the SPD’s larger programmatic shifts over time,

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4

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Figure 7.1 German real GDP growth and unemployment rate, 1991–2015 Note: The figures show Germany’s real GDP growth rate (top) and unemployment rate (bottom) from 1970 to 2015. Source: OECD.

I classify the elections into five different periods, shown in Table 7.1. For each period, I first calculate the aggregate left–right position of the SPD party and the CDU/CSU to examine whether there was a neoliberal convergence before the crisis. The results are shown in Figure 7.2. The figure indicates that in the 1970s, there was a clear difference between the SPD and the CDU/CSU in economic terms, but that this difference became significantly smaller in the 1990s and

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Fiscal Policies of the German SPD Table 7.1 List of elections by time period Time Period

Election

1970s 1990s Pre-crisis Crisis Post-crisis

1976 1994, 1998 2002, 2005 2009, 2013 2017

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Figure 7.2 Left–right position of the SPD and CDU/CSU over time Note: The figure shows the weighted average position of the SPD and the CDU/CSU on all economic issue categories (welfare, economic liberalism, and budgetary rigour). The positions are weighted by the relative salience of each category.

2000s. Before the Great Recession, both the SPD and the CDU/CSU had moved towards the centre, which limited the programmatic competition on the economy. This convergence was partly reversed during the crisis, when the SPD moved markedly towards the left. However, the leftward shift of the CDU/CSU under Angela Merkel undermined the SPD’s programmatic reorientation. By adopting similar positions, the CDU/CSU neutralized much of the SPD’s programme. In combination with competition from the far left, this squeezed the strategic space for the SPD. The far-left party Die Linke had been founded by a merger between the East German Party of Democratic Socialism (PDS) and the Electoral Alternative for Labour and Social

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1970s Category Budget

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Figure 7.3 Left–right position of the SPD on different economic categories over time Note: The figure shows the SPD’s positions on different economic issue categories. The value of +1 refers to support for budgetary rigour (circle), economic liberalism (triangle), and opposition to welfare (square), respectively. The size of the symbols corresponds to the relative salience of each category.

Justice (WASG) in 2007. In 2009, it competed in the federal election for the first time as a national party, which made the SPD’s strategic position more difficult. To properly characterize the economic response of the SPD to the crisis, it is useful to distinguish between the positions of the SPD on three different economic categories: welfare, economic liberalism, and budgetary rigour. The results of this exercise are plotted in Figure 7.3. The figure shows that in the 1970s, the SPD still had a very consistent economic platform that was in line with traditional left-wing positions. The party supported the welfare state but opposed both economic liberalism and a rigid budgetary policy. In the 1990s, however, the SPD began its march towards the centre by changing its position on budgetary rigour. It shifted towards the right and adopted a position that was not much different from that of the CDU/CSU. In the 2000s, this convergence of the SPD and the CDU/CSU also extended towards economic liberalism. The SPD bought into the dogma of the day and supported the liberalization of labour markets and deregulation of the economy, as set out by the Third Way (Nachtwey, 2013; Seeleib-Kaiser, 2002). Interestingly, in the early 2000s, the SPD hardly changed its position on social policies despite passing Agenda 2010. The party’s commitment to the welfare state remained

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a cornerstone of its electoral programme, although this commitment might not have been credible with the public. In the wake of the financial crisis, the SPD changed its economic programme yet again. The party shifted towards the left both on welfare and economic liberalism; this shift was particularly large in the case of the latter, as social democrats became a lot more sceptical about the merits of free markets. For example, the SPD supported tighter regulation of financial markets and campaigned for the introduction of a minimum wage. At the same time, the party did not change its position on budgetary rigour and still retained a very centrist position in the post-crisis era. This created significant tensions within the party’s programme: it attempted to campaign on a left-wing platform with regard to social policies and economic liberalism, but it also supported conservative fiscal policies. To deflect from this inconsistency, the SPD increased the salience of issues relating to the welfare state and economic liberalism, while reducing the salience of budgetary policies. This was especially the case in 2017, when the SPD competed on a centrist fiscal programme that hardly featured in their election campaign. The SPD, therefore, lacked a coherent platform based on an economic paradigm. It combined individual policy initiatives in a piecemeal fashion, which diluted the party’s brand and undermined its ability to influence the economic discourse in Germany.

Explaining austerity from the left in Germany To explain the SPD’s puzzling fiscal policy in response to the Great Recession, I again use process tracing. The analysis starts in 2008 after the beginning of the financial crisis and ends in 2015, when the euro crisis reached its last climax (with the approval of the third Greek bailout package) and public attention turned towards the refugee crisis. My main sources are twenty-one elite interviews with SPD politicians and policymakers, conducted between August 2016 and March 2018. As I suggested earlier, these interviews allow me to unpack the official narrative behind the SPD’s economic programme and to elucidate the causal mechanisms behind the party’s response to the Great Recession. A full list of all the interviews conducted is included in the Appendix at the end of this chapter, which also explains the rationale for selecting those interviewees.⁵

⁵ All translations of quotes from both interviews and secondary sources are my own.

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The crisis years—the SPD’s response to the financial crisis, 2008–10 The SPD and Germany’s Keynesian moment The SPD struggled to develop a coherent position on fiscal policies in response to the Great Recession. Although it was the junior partner in the grand coalition, it was in control of both the finance and labour ministries when the financial crisis hit. Before the crisis, Finance Minister Peer Steinbrück had planned to reach a balanced budget by 2011. As the centre-left government under Schröder had been widely criticized for breaking the Maastricht criteria in the early 2000s, the finance minister was determined to put Germany on a path of fiscal consolidation. In the words of one adviser, ‘There was a clear anti-Keynesian attitude in the finance ministry’ (economic adviser A, personal interview, 31 January 2018), and several economic advisers reported that in autumn 2008, Steinbrück was hesitant about mobilizing a significant amount of financial resources. He famously said in September 2008 that the financial crisis was an American problem, and he had ‘held the position for a long time that Germany did not need a stimulus package’ (economic adviser A, personal interview, 31 January 2018). In December 2008, Steinbrück even criticized the stimulus programmes being implemented in the UK and elsewhere, saying that ‘the switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking’ (Theil, 2008). Ralf Stegner (personal interview, 19 December 2017), an influential politician from the left of the party and former deputy leader of the SPD, recalled that in 2008 ‘the party leadership struggled to shift from the Agenda 2010 towards a demand-driven policy’. As Gustav Horn put it, before the crisis ‘the leading paradigm was that Keynesian demand management does not work, which was also the dominant belief among leading politicians in the SPD’ (personal interview, 14 November 2017). Similarly, another economic adviser to the SPD (economic adviser B, personal interview, 15 March 2018) emphasized that ‘the German view that debt is problematic had been dominant within the SPD since the departure of Lafontaine, and the party did not have the self-confidence to step out of the shadows and argue against this view’. However, the prevailing orthodoxy within the finance ministry and the SPD leadership did not go unchallenged. According to Michael Dauderstädt (personal interview, 14 November 2017), ‘the SPD was divided in this situation: the left wing argued very clearly for economic stimulus programmes, but the right wing had reservations about the effectiveness of these programmes’. Nonetheless, the dramatic economic events that unfolded

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in autumn 2008 eventually undermined the reservations of the moderates. The voices demanding government action became louder both within and outside the SPD as the crisis worsened and the government agreed on a first stimulus package (Konjunkturpaket I) on 5 November 2008. This package, worth €12 billion, was passed by the Bundestag in early December. Joachim Poß, an MP who was responsible within the SPD parliamentary group for budgetary affairs, justified the first stimulus programme by saying that ‘we believe that it is right to let the automatic stabilizers of the budget work in the current situation. We believe it is wrong to save in the downturn …We, in the grand coalition, want to actively fight [the crisis]’ (Deutscher Bundestag, 2008, p. 20,238).⁶ The first stimulus programme was quickly dismissed as insufficient, however. The collapse of the world economy had had a considerable impact on Germany’s export-oriented economy (see Figure 7.1) and criticisms of the government from unions and employer associations grew louder towards the end of 2008. There were vociferous calls for additional deficit spending (Farrell and Quiggin, 2017) and, in response to the grim economic outlook at the end of 2008, the SPD also took up these calls for more action. On 4 January 2009, it put forward a Pact for Stability and Growth (SPD, 2009), which called for increases in government spending. Among other things, it demanded a higher level of public investment, additional training for the unemployed, a reduction in social security contributions, and cash subsidies for car purchases. The SPD (2009) justified this pact by arguing that we want to cushion and shorten the imminent crisis with public investments, economic measures and incentives for consumption until the end of 2010. For this purpose, we are prepared to temporarily put aside the goal of balanced state and federal budgets. We are acting countercyclically. Therefore, we believe that it is right and necessary that we should pay for the fight against the economic crisis by borrowing more.⁷

Within the span of a few days, the German government had largely adopted the SPD’s proposals, and it agreed on a second stimulus package (Konjunkturpaket II) on 12 January 2009. The package was worth €50 billion and contributed to a substantial increase in government spending in ⁶ Author’s translation; Original: ‘Wir halten es aber für richtig, in der jetzigen Situation die automatischen Stabilisatoren des Budgets wirken zu lassen. Wir halten es für falsch, dem Abschwung noch hinterherzusparen …Wir in der Großen Koalition wollen aktiv gegensteuern.’ ⁷ Author’s translation; original: ‘Wir wollen die bevorstehende Krise mit öffentlichen Investitionen, Wirtschaftsmaßnahmen und Konsumanreizen bis Ende 2010 abfedern und verkürzen. Dafür sind wir bereit, das Ziel eines ausgeglichenen Staats- und Bundeshaushalts vorübergehend zurück zu stellen. Wir handeln antizyklisch. Darum halten wir es für richtig und notwendig, dass wir die Bekämpfung der Konjunkturkrise durch eine Erhöhung der Neuverschuldung gegenfinanzieren.’

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55.0

Percentage of GDP

52.5

50.0

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47.5

45.0

42.5 1990

1995

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Year

Figure 7.4 German government spending and revenues, 1991–2015 Note: The figure shows the level of the German government’s total spending and total revenues as a share of the country’s GDP. Source: OECD.

2009 and 2010, as shown in Figure 7.4. Although the government was initially more reluctant to pursue Keynesian deficit spending than some of its European counterparts (Schulze-Cleven and Weishaupt, 2015; Vail, 2014), it still went a long way towards rediscovering the merits of Keynes. In the end, the German stimulus was even larger than the French stimulus (Schelkle, 2012) and those of many other countries. However, the package was more influenced by the demands of trade unions and employer associations and the pressures of the day than by an economic paradigm. Poß (personal interview, 22 September 2016) recalled that ‘in 2008 we had no textbook that we could follow, but there was not much time to develop economic paradigms, either’. Instead, in the words of Christian Kellermann, a former adviser to the SPD’s executive board and head of its economic policy unit, ‘as a result of the pressure, a window of opportunity opened for government stimulus programmes. For a short period of time, this became the new zeitgeist as it became clear that you had to do something in response to the crisis’ (personal interview, 18 December 2017). Another economic adviser stated that ‘in retrospect, Peer Steinbrück realized that he had been wrong when all mainstream economists agreed that Germany would need some stimulus’ (economic adviser B, personal interview, 15 March 2018). The stimulus programmes were also supported for electoral reasons. The country was to hold elections in September 2009, and knowledge of this

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influenced the government’s strategy. The SPD believed that voters expected politicians to have the ‘courage to take unconditional steps’ and to provide ‘clear guidance’ out of the crisis (SPD, 2009). In this context, the party not only justified additional government spending as demand management pure and simple, but also emphasized that that spending should be used to improve economic productivity. For example, it maintained that the stimulus programmes would ‘improve infrastructure’ and ‘increase people’s potential and skills’ (SPD, 2009). This argument was in line with the supply-side policies that the party had implemented before the crisis, and was thereby helpful in justifying its reversion to demand management. The SPD and the Schuldenbremse The party’s ambiguous position on Keynesianism came to light most clearly when the grand coalition changed the Constitution by incorporating the Schuldenbremse policy in May 2009. The initiative for this debt brake had arisen several years before the financial crisis, but calls for such a plan had grown louder when the government adopted deficit spending. Eventually, both the federal and the state governments agreed to constitutionally limit the size of public deficits: while the federal government would only be allowed to run a deficit of up to 0.35 per cent of GDP, state governments would be prohibited from running budget deficits at all.⁸ The Schuldenbremse thus signalled a clear commitment to fiscal consolidation among German policymakers, and the SPD was instrumental in ensuring its place in the German constitution: while the finance ministry, which had been continuously under the SPD’s control since the 1998 election, prepared the policy, the party pushed it through the upper and lower chambers of parliament. In the parliamentary debate prior to the vote on the debt brake in March 2009, Steinbrück called the Schuldenbremse a ‘decision of historic significance’ (Deutscher Bundestag, 2009, p. 24,866).⁹ He argued that Germany was stuck in a vice of indebtedness and emphasized that 15 per cent of the federal budget already had to be used for interest-rate payments. This reduced the amount of money that the government could spend elsewhere and threatened the state’s capacity in the long term. Therefore, Steinbrück stressed that ‘a state that can act needs to have public finances that are viable in the long term’ (Deutscher Bundestag, 2009, p. 24,868).1⁰ According to him, the Schuldenbremse had been designed to ensure that this would be the case. ⁸ In exceptional situations and to respond to economic downturns, the federal government would still be allowed to run larger government deficits. ⁹ Author’s translation; original: ‘Entscheidung von historischer Tragweite’. 1⁰ Author’s translation; original: ‘Ein handlungsfähiger Staat braucht langfristig tragfähige öffentliche Finanzen.’

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This position was shared by many on the right wing of the party. Carsten Schneider (personal interview, 22 October 2016), a budgetary spokesperson for the SPD, emphasized that ‘higher debt generally also means that the government has to pay higher interest rates. And I do not want us to use the government’s current income for interest expenses.’11 Even Joachim Poß (personal interview, 22 September 2016), who comes from the left wing of the party, pointed out that there were ‘also good reasons for the state to give itself room for manoeuvre. The lower the debt, the higher the ability of the state to act.’ This is in line with the ‘progressive consolidation thesis’ (Haffert and Mehrtens, 2015), which emphasizes that consolidation is necessary to ensure the state’s long-term capacity. Although this view was popular among some SPD politicians, the Schuldenbremse was ‘not an SPD project and it was very controversial within the party’ (Wolfgang Thierse, personal interview, 7 September 2016). The leftwing members of the party were concerned that the Schuldenbremse would undermine the fiscal space available to the state and threaten the provision of social services. They were supported by the trade unions (e.g. Deutscher Gewerkschaftsbund, 2009) and by a public appeal from economists, spearheaded by Peter Bofinger and Gustav Horn, who argued that ‘the restriction of the remaining room for manoeuvre for macroeconomic policies, which the debt brake aims at, endangers the overall economic stability’ (Bofinger and Horn, 2009). As a result, the Schuldenbremse only passed narrowly, as nineteen left-wing social democratic MPs voted against it in the Bundestag and three SPD-led state governments rejected it in the Bundesrat. Ultimately, the crisis and the stimulus packages implemented by the grand coalition in response to it actually helped the passage of the Schuldenbremse. Against the background of the stimulus, concerns about fiscal sustainability grew larger among voters and politicians. Steinbrück explicitly linked the debt brake to the stimulus programmes, arguing that it was necessary to ensure that the federal and state governments returned to the path of fiscal consolidation (Deutscher Bundestag, 2009). Similarly, the SPD (2009) also supported the debt brake in its Growth and Stability Pact. It argued that as soon as the economy improved again, with a view to the burden on future generations, we must then quickly return to the policy of budget consolidation. Rising interest rates are a serious mortgage for our children and grandchildren—particularly against the backdrop of demographic 11 Schneider had already been instrumental in putting the question of government on the table before the economic crisis. Along with other SPD politicians and policymakers, he had been the co-author of several papers demanding immediate action on Germany’s debt.

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change in Germany …That is why we want to maintain the aim of introducing a debt brake in the Constitution.¹²

Consequently, the conflict within the SPD about the Schuldenbremse was resolved for tactical reasons. As Stegner (personal interview, 12 December 2017) recalled, ‘there were only very few people in the SPD that defended the Schuldenbremse on economic grounds. However, the zeitgeist was extremely powerful, and concerns that we would be portrayed as a debt- and taxraising party if we were to object to the debt brake dominated the whole debate.’ Similarly, Poß (personal interview, 22 September 2016) argued that ‘the project was very controversial, but in the political-tactical game we were again and again confronted with the claim from the conservative side that social democrats cannot deal with money. We wanted to counter this claim with the debt brake.’ Philipp Steinberg (personal interview, 22 November 2017), then an economic adviser to the SPD leadership, also argued that we supported the debt brake because we wanted to throw out a certain safety net for ourselves. We wanted to show that we were responding to the crisis, but that it is not a general rule that we—as social democrats—cannot deal with money …There was some effort to make it clear that the SPD is interested in sound fiscal policies.

The finance minister Peer Steinbrück pushed particularly hard for the debt brake in order to to ‘reassure himself that the government’s actions were still in line with his pre-crisis policies’ (economic adviser B, personal interview, 15 March 2018). Yet foreign minister Frank-Walter Steinmeier also put his weight behind the initiative. He had already been chosen as the SPD’s candidate for the upcoming election in 2009 and it was ‘very important for him that he was not seen as the candidate that could not deal with money’ (Heiko Geue, personal interview, 21 November 2017).13 In the context of the upcoming electoral campaign, the leadership of the SPD was even able to convince many from the left wing of the party. For example, Lothar Binding, the financial spokesperson of the SPD, argued that ‘the citizens wanted the debt brake 12 Author’s translation; original: ‘Mit Blick auf die Belastungen der künftigen Generationen müssen wir dann sehr rasch zur Politik der Haushaltskonsolidierung zurückkehren. Steigende Zinslasten sind eine schwere Hypothek für unsere Kinder und Enkel - besonders vor dem Hintergrund des demografischen Wandels in Deutschland …Deshalb wollen wir daran festhalten, eine gesetzliche Begrenzung der Schuldenaufnahme im Grundgesetz zu verankern.’ 13 For similar reasons, Steinmeier’s economic programme for the 2009 election, the so-called Deutschland Plan, also focused less on the demand-side policies the party had pursued in response to the crisis and more on supply-side policies to generate long-term growth. As one economic adviser put it, the SPD ‘never offensively claimed credit for the stimulus programmes …[these programmes] did not correspond to the German mainstream economic thinking’ (economic adviser B, personal interview, 15 March 2018).

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and as a party, we could not escape this pressure in 2009. I always tried to explain why I did not think it was sound economic policy, but it was not a decision of conscience for me and thus I followed the party line in the parliamentary vote’ (personal interview, 23 November 2017). As Thierse (personal interview, 7 September 2016) emphasized, the SPD realized that ‘to polarize and argue for debt is not popular …The fear of accumulating debt is higher in Germany than it is in other countries.’ Ahead of the elections, the SPD was unwilling to argue against this dominant view.

The austere years—torn between opposition and government, 2009–15 The SPD in opposition A year after the beginning of the economic crisis, the SPD was rewarded neither for its crisis management nor for the debt brake. In the federal elections of 2009, the party only polled 23.0 per cent, which was its worst result since 1945. After eleven years in government, the party was forced to go into opposition as Merkel’s CDU/CSU formed a coalition government with the FDP. Subsequently, the SPD attempted to renew its economic programme. Sigmar Gabriel, the new party leader, and Frank-Walter Steinmeier initiated an economic council, which was tasked with helping to develop a new economic profile for the SPD. The council included a very diverse range of advisers, but the push for programmatic renewal was undermined by the crisis in the eurozone, which began to overshadow all other discussions (Michael Dauderstädt, personal interview, 28 November 2017). In response to the crisis, the German government began to preach austerity. It agreed to support other heavily indebted eurozone countries but demanded tough austerity measures and structural reforms across Europe in return. Led by Angela Merkel and Wolfgang Schäuble, the government pushed for stricter European rules, which were enshrined in the ‘Two-Pack’, the ‘Six-Pack’, and the Fiscal Compact. Following the example of the German Schuldenbremse, these rules were designed to limit the fiscal space of EU member states, allowing the German government to impose economic orthodoxy across the eurozone. The SPD struggled to position itself in response to the eurozone crisis. In the beginning, it opposed the government’s policies in the Bundestag and abstained from the votes on the first Greek bailout and the European Financial Stability Facility (EFSF) in May 2010. It criticized the government for failing to share the costs of the bailouts with the private sector and made its

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support conditional on a financial transaction tax (Wonka, 2016). However, in autumn 2010, the SPD reverted back into ‘grand coalition mode’ and supported all the other bailout packages that were passed in response to the crisis (Degner and Leuffen, 2016, p. 11). Social democrats still tried to condemn the austerity regime that had been created by Merkel and Schäuble and argued for more solidarity with crisis-ridden countries in Europe. For example, Joachim Poß argued that ‘solidarity in Europe will cost less for Germans in the end than ever more concessions enforced by Germany’ (Deutscher Bundestag, 2012, p. 22,874).1⁴ Nonetheless, the party struggled to consistently challenge the government’s approach to the eurozone crisis. It largely bowed to the government’s view that reckless fiscal spending by debtor countries had caused the crisis and that the periphery needed to implement structural reforms to get out of it. Privately, leading SPD politicians believed that Merkel’s strategy was wrong, but they were lost when it came to developing an alternative (Gesine Schwan, personal interview, 11 August 2016). Importantly, the party was confronted with a public debate that was very critical of European fiscal transfers, and the SPD was keenly aware of this sentiment. For example, Johannes Kahrs reported that it was very difficult to explain to voters why Germany should continue to support the Greek government: When I discuss the issue of Greece in my constituency—whether it’s at a house visit, at a public information stand, or even at the Stammtisch—many people say: ‘you can’t be serious about giving another 50, 60, 70, 80 billion euro to Greece. That’s our money on the line. Are you insane?’ (Deutscher Bundestag, 2015a, p. 11,383)¹⁵

This perceived unpopularity of European fiscal transfers strongly influenced the SPD. Several politicians confirmed that the SPD leadership believed that public opinion could not be changed; i.e. they regarded themselves as unable to counter the dominant public view that had emerged in Germany. For example, Ralf Stegner (personal interview, 19 December 2017) recalled that ‘to put it bluntly, the SPD was always afraid to debate and propose solutions that had the slightest appearance of leading towards a transfer union. The debates were always conducted aggressively against the SPD, and the party dreaded the debate and the prevailing opinion.’ Similarly, Binding (personal 1⁴ Author’s translation; original: ‘Solidarität in Europa wird die Deutschen am Ende weniger kosten als immer neu von Deutschland erzwungene Zugeständnisse.’ 1⁵ Author’s translation; original: ‘Wenn ich bei mir im Wahlkreis über das Thema Griechenland diskutiere, ob bei Hausbesuchen, an Infoständen oder selbst beim Stammtisch, dann sagen ganz viele Menschen: Es ist doch nicht euer Ernst, dass ihr jetzt noch einmal 50, 60, 70, 80 Milliarden Euro nach Griechenland geben wollt. Wir bürgen mit unserem Geld dafür. Seid ihr denn wahnsinnig?’

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interview, 23 November 2017) recalled: ‘we did not see an opportunity to change public opinion’. In retrospect, former SPD deputy leader Thorsten Schäfer-Gümbel (personal interview, 13 December 2017) reflected that ‘the SPD was too intimidated during the euro crisis. Especially with difficult questions, you have to maintain your position, which we did not manage at the time.’ Instead, social democrats accepted the dominant narrative about the eurozone crisis as it was portrayed in the media, and the party leadership chose to run with the majority opinion.1⁶ There was no lack of ideas for alternative policies within the SPD. During the euro crisis, many policy proposals were drawn up, discussed, and coordinated with other social democratic parties across Europe, including ideas for Eurobonds; a European Marshall Plan; a eurozone budget; a common unemployment insurance scheme; and a European redemption fund. However, the party was torn between contradictory aims: although it was ideologically committed to solidarity and the European project, it did not want to become associated with unpopular European transfers. Therefore, the party always eventually backtracked from ideas which would cost the German taxpayer money (Hacker, 2012, 2015). The case of Eurobonds is illustrative here. In 2010, in a joint op-ed in the Financial Times, Steinmeier, then leader of the SPD in Germany’s parliament, and Steinbrück called for Germany to take bold action to end the crisis in the eurozone (Steinmeier and Steinbrück, 2010). They presented a three-point plan, including the creation of Eurobonds, ‘to send the message that Europe is strong, united and willing to deal jointly with whatever critical market situation emerges’. After pushback from the government and the media, the SPD leader Gabriel was initially reluctant to commit to this position. In summer 2011, however, Gabriel, Steinmeier, and Steinbrück jointly presented a plan for Eurobonds together with a substantial haircut on Greece’s debt (Geis and Krupa, 2011). They criticized Merkel’s approach to the eurozone crisis and demanded unpopular decisions be made. This was integrated into a general strategy, which stressed that ‘one-sided austerity packages, which hurt employees, pensioners, and the social infrastructure are definitely wrong’ (SPD Fraktion, 2011).1⁷ However, after facing fierce public criticism and disagreements within the party, the SPD reconsidered its position. Eventually, Gabriel backtracked

1⁶ Dauderstädt (personal interview, 14 November 2018) put it as follows: ‘The party’s position was strongly driven by public opinion …It tended to follow the popular Volksseele instead of offensively advocating for other positions.’ 1⁷ Author’s translation; original: ‘Die einseitigen Sparkonzepte zu Lasten von Arbeitnehmern, Rentnern und sozialer Infrastruktur sind sicher falsch.’

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and publicly rejected the idea of Eurobonds. In spring 2012, shortly after François Hollande’s election as president of France—a time when a different pro-European policy briefly seemed possible—Gabriel ruled out Eurobonds. He said ‘what are Eurobonds: they are jointly guaranteed debts. In general, this will certainly not exist’ (Reuters, 2012).1⁸ The sentiment behind this statement was very similar to Merkel’s view. In 2012, she said that there would be no Eurobonds ’as long as [she] live[d]’ (Spiegel, 2012). A few months later, Gabriel changed direction again. In August 2012, philosophers Jürgen Habermas and Julian Nida-Rümelin jointly drew up a proposal with economist Peter Bofinger which included an idea that resembled Eurobonds. In an essay published in the Frankfurter Allgemeinen Zeitung, they argued for a ‘joint liability for government bonds in the euro area’ of up to 60 per cent of GDP for each member state (Bofinger et al., 2012). The SPD leader Sigmar Gabriel supported this position, and held a press conference after the essay was published during which he said: ‘you will not be able to hold the euro together without a common financial and tax policy …We have a common currency, but no common finance or budget policy’ (EU Observer, 2012). In the end, the party did not include Eurobonds in its election programme in 2013, but the constant back and forth on this issue undermined the party’s credibility.1⁹ As Gesine Schwan (2012) critically pointed out, the party did not dare to maintain positions that could contradict perceived public opinion. It always based its European policy on national parameters and electoral considerations. This was made explicit when Thomas Oppermann stated: ‘first, we are responsible for our country’ (Monath, 2012).2⁰ Similarly, Carsten Schneider argued: we as the German parliament have to make decisions based on the legitimation that we received from our voters. The SPD electoral programme from 2009 did

1⁸ Author’s translation; original: ‘Was sind Eurobonds: Das sind gemeinschaftlich garantierte Schulden. Das wird es in der Allgemeinheit garantiert nicht geben.’ 1⁹ Other SPD leaders played for time. For example, chief whip Thomas Oppermann argued in November 2011 that Europe was not ready for Eurobonds. In his words: ‘ Eurobonds will only be possible after extensive EU treaty changes in a united Europe. This will still take some time’ (Heithecker and Sturm, 2011). (Author’s translation; original: ‘Euro-Bonds sind nur nach umfangreichen EU-Vertragsänderungen in einem vereinten Europa möglich. Das wird noch dauern.’) The party congress in December 2011 made a similar decision. It stated: ‘joint liability—whether under the current rescue package or through jointly guaranteed bonds—is not possible without controls. The SPD is ready to tackle the necessary changes to the European treaties.’ (Author’s translation; original: ‘Gemeinschaftliche Haftung—sei es im Rahmen des derzeitigen Rettungsschirms oder durch gemeinsam garantierte Anleihen—ist ohne eine gemeinschaftliche Kontrolle nicht möglich. Die SPD ist bereit, die dafür notwendige Änderung der Europäischen Verträge in Angriff zu nehmen.’) 2⁰ Author’s translation; original: ‘Wir sind zuerst für unser Land verantwortlich.’

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not say that we support direct transfers to other national parliaments. (Deutscher Bundestag, 2015b, 7,224)²¹

Thus, the SPD bowed to the popular narrative that reckless fiscal spending by debtor countries had caused the economic crisis; it also argued that the countries of the crisis-ridden periphery needed to do their ‘homework’ to get out of that crisis. Not only was the SPD influenced by electoral considerations, but it was also trapped by its past economic policy. Following the logic of supplyside economics, Germany had undergone painful economic reforms and austerity policies before the crisis. Importantly, during the economic downtown, Agenda 2010 came increasingly to be seen as a success story. While other countries were stuck in the crisis, Germany bounced back relatively quickly; the headline figure of unemployment remained low and continuously declined from 2009 to 2015 (Figure 7.1). The right wing of the SPD, which had supported Agenda 2010, claimed that this economic situation was the direct result of the reforms, a claim which facilitated the interpretation of the crisis as a morality tale of saints and sinners (Matthijs and McNamara, 2015). As one economic adviser stressed (economic adviser C, personal interview, 18 August 2016), ‘many people in the SPD who pushed for the Agenda 2010 under Schröder felt compelled to support Merkel’s euro course’, arguing that ‘policies that were good for us, would also be good for other countries, without considering that in the middle of the crisis austerity might be counterproductive’. Therefore, the SPD turned towards supply-side economics to justify the lack of European demand management. Although many politicians were not ideologically convinced of the virtues of austerity, the centrist wing of the party believed that structural reforms were important to solving the crisis and that these reforms would not be pursued if the debtor countries had more fiscal space. According to Schneider (personal interview, 20 October 2016), his experience was that governments would use fiscal space to reduce taxes instead of making productivity-increasing investments. This view was largely in line with those of the majority of German economists and the CDU/CSU, who believed that supply-side reforms were more important than demand stimulus in addressing Europe’s problems. The SPD, therefore, found it difficult to oppose austerity even though many SPD politicians, and especially 21 Author’s translation; original: ‘Wir als deutsches Parlament haben jedoch Entscheidungen bezogen auf die Legitimation zu treffen, die wir von unseren Wählern bekommen haben. In dem Wahlprogramm der SPD aus dem Jahr 2009 stand nicht, dass wir direkte Transfers, also Überweisungen und Zuschüsse an die jeweiligen anderen nationalen Parlamente, leisten.’

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those from the left wing of the party, believed that it was the wrong policy (political adviser, personal interview, 19 October 2017). At the same time, the euro crisis also influenced Germany’s domestic fiscal policy. In Germany, the economy improved in 2010, as shown in Figure 7.1. In the context of the first Greek bailout, the German government argued for fiscal consolidation at home and introduced spending cuts in June 2010. While the unions heavily criticized these spending cuts (Vail, 2014), the SPD only put up mild opposition. For example, Joachim Poß (Deutscher Bundestag, 2010, p. 5,278) said in a parliamentary debate: ‘the so-called austerity package lacks a clear goal, a compass. The growth momentum for the period after the economic stimulus packages has expired is lacking.’22 The right wing of the SPD, however, went so far as to criticize the government for not being austere enough: the budgetary spokesperson Carsten Schneider argued that half of the cuts were false accounting entries. He continued to criticize Wolfgang Schäuble on these grounds in the following years, arguing that Schäuble had weakened Germany’s position in Europe by toying with the debt brake. According to Schneider, the coalition of the CDU/CSU and FDP had not yet come to terms with the ‘new reality, which had changed due to the new debt brake’ (Hulverscheidt, 2010).23 He demanded that the responsibility for calculating the government budget deficit should be taken away from the finance ministry and given to the Council of Economic Experts. This position on domestic fiscal consolidation was strongly influenced by the sovereign debt crisis in Europe. According to the dominant narrative in Germany, the crisis illustrated the dangers of over-indebtedness, strengthening the German suspicion regarding public debt. Data from the Eurobarometer, shown in Figure 7.5, indicates that the great majority of Germans agreed that the reduction of Germany’s government debt should be a priority throughout the crisis. According to the data, 88.3 per cent of all Germans agreed that the reduction of Germany’s government debt should be a priority; only 11.7 per cent of the population believed that it should not be a priority. Importantly, at the beginning of the eurozone crisis, support for fiscal consolidation even increased; it would remain at a high level throughout the crisis. It reached its lowest level in 2015, when 82.3 per cent of all respondents still believed that fiscal consolidation should be a priority for the German government.

22 Author’s translation; original: ‘Dem sogenannten Sparpaket fehlt das Gestaltungsziel, der Kompass. Es fehlt der Wachstumsimpuls für die Zeit nach dem Auslaufen der Konjunkturpakete.’ 23 Author’s translation; original: ‘Die Steuersenker in der Koalition sind immer noch nicht in der Realität angekommen, die sich durch die neue Schuldenbremse verändert hat.’

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Share of respondents

0.75 Response Agree

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Figure 7.5 Attitudes towards government debt in Germany, 2010–15 Source: Eurobarometer Note: The figure shows the share of German respondents who agree/disagree with the statement that ‘measures to reduce the public deficit and debt in (OUR COUNTRY) cannot be delayed’. It is based on Eurobarometer surveys from 2010 to 2015.

This support for fiscal consolidation also influenced the SPD’s fiscal policies. For example, Schäfer-Gümbel (personal interview, 13 December 2018) argued that ‘it was the majority opinion in the leadership of the SPD that you could not prevail against the mainstream view, which is clearly against public debt’. In 2011, the SPD party conference agreed to a motion that made the connection between the euro crisis and domestic policy explicit. The motion stated: ‘the crisis in the European Monetary Union shows us with a new urgency that government borrowing needs to be reduced. That is why we will consistently comply with the debt rules and use economic tax revenues to reduce borrowing’ (SPD Fraktion, 2011).2⁴ The SPD argued that it would be in favour of a consolidation process that was growth-friendly and depended on the economic business cycle (a so-called wachstums- und konjunkturorienten Konsolidierungsprozess). In line with the progressive case for austerity and fiscal consolidation, the SPD believed that the state’s fiscal capacity needed to be secured in the long term. This required fiscal consolidation in the short term and, hence, the SPD did not oppose the reduction in government spending by Merkel’s government. Instead, it raised objections to the tax cuts that the 2⁴ Author’s translation; original: ‘Die Krise in der Europäischen Währungsunion, zeigt uns mit neuer Dringlichkeit, dass die Neuverschuldung reduziert werden muss. Deshalb werden wir die Schuldenregel konsequent einhalten und konjunkturelle Steuermehreinnahmen zur Senkung der Neuverschuldung nutzen …!’

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government implemented, which were financed on credit, arguing that they undermined the state’s tax base. The SPD’s return to government The SPD continued to support orthodox fiscal policies when it returned to power in 2013 as a member of the second grand coalition under Merkel. The finance ministry remained in the hands of Schäuble, who continued to shape both Germany’s and Europe’s economic policy. At the beginning of the legislative period, he presented a balanced budget (achieving the so-called Schwarze Null), and despite national and international demands that Germany’s government should spend more, the SPD was hesitant to question this policy. Germany’s debt-to-GDP ratio remained higher than the stipulated figure laid out in the European SGP of 60 per cent, and public discourse in Germany was still concerned about lowering debt. Internally, the SPD regularly had controversial debates, but in public, the SPD even presented the Schwarze Null as a success. For example, Kahrs insisted: ‘finally, we are on the way to breaking this dangerous debt spiral …we are reaching a balanced budget …Wir Roten kämpfen für eine schwarze Null’ (Deutscher Bundestag, 2014c, p. 2,244).2⁵ Similarly, Thomas Oppermann justified the SPD’s support for the balanced budget by arguing that ‘only a state that has financial leeway can invest, shape, and redistribute’ (Deutscher Bundestag, 2014a, p. 4,567).2⁶ Several social democrats emphasized that consolidation was more than a fetish, returning to arguments about intergenerational justice and the capacity of the state to act, in line with the progressive consolidation thesis. For example, Kahrs maintained: we do not save for saving’s sake, we save because our debts and interest rates put our children and our grandchildren in a dangerous position. We are taking away their room for manoeuvre. And that is the point: we save for the benefit of future generations. (Deutscher Bundestag, 2014c, p. 2,244)²⁷

This argument was pervasive within the SPD because it allowed the party to legitimize fiscal consolidation on its own terms. In the context of the demographic change resulting from an ageing society, the SPD attempted to 2⁵ Author’s translation; original: ‘Wir sind auf einem guten Weg, die gefährliche Schuldenspirale endlich zu durchbrechen …wir kommen zu der schwarzen Null …Wir Roten kämpfen für eine schwarze Null.’ 2⁶ Author’s translation; original: ‘Nur ein Staat, der finanziellen Spielraum hat, kann investieren, kann gestalten und kann für sozialen Ausgleich sorgen.’ 2⁷ Author’s translation; original: ‘Wir sparen nämlich nicht um des Sparen willens, sondern wir sparen weil wir mit den Schulden und den Schuldenzinsen unsere Kinder und unsere Enkel in eine gefährliche Lage bringen. Wir nehmen ihnen nämlich dauerhafte Spielräume. Und das ist der Punkt: wir sparen dafür, dass es zukünftigen Generationen besser geht.’

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present fiscal consolidation as an inherently social democratic policy (due to its concern with intergenerational equity). The party also supported the Schwarze Null because of its popularity. According to a survey from the Forschungsgruppe Wahlen, conducted in November 2014, 66 per cent of the population were in favour of balanced budgets. Schäuble gleefully cited this survey in a parliamentary debate, saying: ‘if you criticize this fiscal policy, you speak against the broad convictions of the population as well as the scientific expertise in Germany’ (Deutscher Bundestag, 2014b, p. 6,420).2⁸ This was important for the SPD. As Kahrs (personal interview, 16 August 2016) put it: ‘we [could] not find a majority in Germany for an alternative policy, not with our coalition partner and not with the public sentiment in Germany’. As Thierse (personal interview, 7 September 2016) recalled, there was a widespread belief within the SPD that you could not oppose the dominant view propagated by the media and supported by voters: ‘to polarize and argue for debt is not popular …the fear of accumulating debt is higher in Germany than it is in other countries’. Thus, the SPD joined the ‘competition in which balanced budgets were used as a PR strategy to demonstrate economic competence’ (political adviser, personal interview, 19 October 2017). At the same time, the SPD was also aware that Germany’s economic position was threatened by a lack of public investment. Before the federal election of 2013, studies by several economic institutes showed that Germany’s public and private investments were chronically low compared to those of other European countries (e.g. Bach et al., 2013). Especially public investment had plummeted since the 1990s (Bremer et al., 2022), leading to an accute ‘investment gap’. The SPD took up this agenda, and in August 2014, Sigmar Gabriel asked Marcel Fratzscher, the President of the German Institute for Economic Research, to chair a commission to address the problem. Still, the SPD remained cautious and did not support large increases in government spending to finance public investment. When it became clear in October 2014 that the economy was growing more slowly than expected, the party did not abandon the aim of balancing the budget; rather, social democrats perceived it as a dual challenge to simultaneously balance the budget and increase investments. Some politicians within the party accepted that these aims were partly contradictory, but the party tried to resolve this contradiction by arguing that Germany’s biggest problem was the lack of private, not public investment. 2⁸ Author’s translation; original: ‘Sie reden gegen die breite Überzeugung der Bevölkerung wie des wissenschaftlichen Sachverstands in Deutschland, wenn sie diese Finanzpolitik kritisieren.’

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For example, in 2014, Oppermann stated: ‘we do not need any debt-financed short-term flash-in-the-pan programmes for the economy, but strategies for more private investment’ (Oppermann, 2014).2⁹ As a result, the SPD only pushed for relatively small increases in public investment. Officially, it never questioned the doctrine of balanced budgets. For example, in a joint press release, the budgetary spokespeople Schneider and Kahrs emphasized the importance of a balanced budget in 2015 and explicitly argued that ‘a balanced budget and higher investments are not a contradiction’ (SPD Fraktion, 2015). However, in the same press release they added that ‘with higher public investment, we are securing the maintenance and expansion of the infrastructure and thus the future viability of the country’.3⁰ The SPD also did little to oppose European austerity once it returned to government. In the coalition talks with the CDU/CSU, the party dropped the demand for a European debt redemption fund that had been part of its election manifesto (Reuters, 2013). Moreover, the eurozone policy remained firmly in the hands of the chancellor’s office and Schäuble’s finance ministry, leaving little space for the SPD to shape it. In the Bundestag, dissenting votes from the SPD were extremely rare (Degner and Leuffen, 2016, p. 11), as the party only attempted to challenge the austerity by tinkering at the edges, and then with limited success. For example, in 2014 Gabriel and Oppermann demanded a softening of the SGP, supporting calls for such a move from southern European governments (Gaugele et al., 2014; Zeit, 2014). The SPD, however, failed to consistently oppose European austerity, often shifting its position back and forth. The difficult negotiations around the third bailout package for Greece are a case in point. During the negotiations, Schäuble’s proposal for Greece to leave the eurozone was leaked. Most SPD politicians vigorously opposed the proposal, but there were rumours that Gabriel had known and approved of Schäuble’s ‘Grexit’ plans. Afterwards, Gabriel could not maintain a clear position. In a column for Bild Zeitung he said that ‘more and more people feel misled by the Greek government …We are not going to let the German workers and their families pay for the exaggerated electoral promises of a partly communist government’ (Bild, 2015b).31 A week later, he softened his remarks and commented again in the same newspaper, stating ‘we all want 2⁹ Author’s translation, original: ‘Wir brauchen keine schuldenfinanzierten Strohfeuerprogramme für die Wirtschaft, sondern Strategien für mehr private Investitionen.’ 3⁰ Author’s translation; original: ‘Mit höheren öffentlichen Investitionen sichern wir den Erhalt und Ausbau der Infrastruktur und damit die Zukunftsfähigkeit des Landes …Dabei zeigt sich, dass ein ausgeglichener Haushalt und höhere Investitionen kein Widerspruch sind.’ 31 Author’s translation; original: ‘Immer mehr fühlen sich von der griechischen Regierung an der Nase herumgeführt …Wir werden nicht die überzogenen Wahlversprechen einer zum Teil kommunistischen Regierung durch die deutschen Arbeitnehmer und ihre Familien bezahlen lassen.’

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to help Greece’, and saying that he had asked Merkel to ‘save the small people in Germany and Greece’ (Bild, 2015a).32 The leader of the SPD was again caught between his pro-European beliefs and the dominant public discourse, which was perceived to be critical of additional support for Greece. He failed to maintain a clear stance, a situation which was typical of his tenure as leader in general. Public opinion also influenced the SPD’s position concerning the discussion of Germany’s current account surplus, a discussion which intensified over the course of the eurozone crisis. The left wing of the party was critical of Germany’s surplus (economic adviser B, personal interview, 15 March 2018), but the party’s leadership took a different position. They did not deny that the current account imbalances in Europe were a problem, but insisted that reducing them would be a difficult task for the government. Steinberg, then adviser to Gabriel in the economics ministry, argued that ‘reducing current account surpluses is not trivial’ (personal interview, 22 November 2017). Among other things, he pointed to the limited ability of the government to control wages (due to the so-called Tarifautonomie in Germany). Yet the decision to do little about the current account surpluses was also taken for political reasons. As one economic adviser put it, ‘how can you explain to citizens that an economy can be too competitive and that the current account surpluses can be too high?’ (economic adviser A, personal interview, 31 January 2018). The SPD did not have a clear economic paradigm to answer this question, which prevented it from challenging Europe’s imbalances.

Discussion: electoral and ideational pressures for austerity in Germany The politics of austerity As we have seen, the SPD’s fiscal policies were strongly driven by electoral considerations. As concern about the level of public debt grew during the economic crisis, the SPD was quick to demonstrate that it was fiscally conservative. Both private and public debt are regarded with a high level of suspicion in Germany’s political discourse; shortly after the fall of Lehman Brothers in 2008, Angela Merkel had already used the metaphor of the Swabian housewife, for whom ‘money saved is money earned’ (Benoit, 2009), to great effect. 32 Author’s translation; original: ‘Wir all wollen Griechenland helfen’ and ‘Vize-Kanzler Sigmar Gabriel (55, SPD) [hat] Bundeskanzlerin Merkel (60, CDU) aufgefordert, “die kleinen Leute in Deutschland und Griechenland zu schützen”’.

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Like the British Labour Party (see Chapter 6), the SPD believed that it had to take these concerns seriously, as Keynesianism had lost its political appeal in the first year of the crisis. In this discursive environment, the SPD leadership did not think that they could make a Keynesian argument. The party was operating from a position of weakness because it was consistently trailing Angela Merkel’s CDU/CSU in the opinion polls (see Figure 7.6). Moreover, in 2009, the SPD experienced its worst election result of the postwar period. Although the party was only a junior partner in Merkel’s first grand coalition, it had been in government continuously for eleven years. The SPD, which controlled the finance ministry, received the brunt of the blame for the 2007–8 financial crisis and was punished for Agenda 2010. The 2009 election, therefore, unsettled the SPD and led to a change in policy because, as Hall (1989, p. 374) had already pointed out, ‘the fate of Keynesian ideas ultimately depended on their ability

40

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Party Union SPD FDP Die Linke Greens AfD

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20 Ja n

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Figure 7.6 German polls, 2005–15 Note: The figure shows the average monthly support for German parties based on surveys that ask about vote intention. For any given month, it is calculated based on observations gathered by several different polling companies.

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to speak to the interest of the political entrepreneurs who would have to put them into action’. One economic adviser recalled that the SPD was ‘always worried about being portrayed as a party that [could not] deal with money’ (economic adviser A, personal interview, 31 January 2018) and as a ‘party that [did] not have economic competence’ (Christian Kellermann, personal interview, 17 December 2017). Similarly, another economic adviser argued that ‘the great fear of the SPD was that it would be portrayed as an irresponsible party’ (economic adviser B, personal interview, 15 March 2018). In their quest for fiscal credibility, the party leadership, therefore, accepted a conservative viewpoint on debt. This became very clear early on when the SPD supported the Schuldenbremse, as described earlier. In the context of fiscal deficits in 2008 and 2009, the party was afraid of being dragged into a debate about debt. Ahead of the 2009 elections, it attempted to neutralize the issue. Accepting the Schuldenbremse was thus a defensive move for the SPD. The party was strongly driven by concerns about public opinion and was willing to ignore economic arguments from trade unions and left-wing economists. This remained true in the context of the European sovereign debt crisis. As the euro crisis unfolded, voters were constantly presented with warnings about the possible consequences of high public debt and, as a result, ‘the European crisis provide[d] critics of government debt with powerful images and provide[d] them with great public attention’ (Haffert, 2016, p. 27).33 This strengthened the prevailing public mood opinion in Germany and made an alternative domestic and European policy unlikely. In fact, the party leadership came to believe that solid public finances were a useful electoral topic for social democratic parties. In 2008, Schneider stated: ‘I think this is also an absolutely appropriate electoral campaign issue. Balanced budgets and sound finance are a matter of social justice’ (Bröcker, 2008).3⁴ As Schwan (personal interview, 11 August 2016) emphasized, ‘the idea of the Swabian housewife is deeply entrenched in German society. To oppose it requires a strong counterargument paired with the courage to make this argument, neither of which existed within the SPD.’ The SPD was particularly afraid of being associated with a position that was in favour of European debt pooling. In this situation, ‘the fear of the Stammtisch was always more effective than economic arguments’ (Dierk 33 Author’s translation; original: ‘Die europäische Krise stellt den Kritikern staatlicher Verschuldung also mächtige Bilder zur Verfügung und verschafft ihnen große Aufmerksamkeit.’ 3⁴ Author’s translation; original: ‘Ich halte das auch für ein absolut geeignetes Wahlkampfthema. Der Haushaltsausgleich und solide Finanzen haben einen hohen Gerechtigkeitswert.’

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Hirschel, personal interview, 15 December 2017). Stegner recalls that ‘the SPD was concerned about being associated with Eurobonds or other solutions that had even the slightest appearance of a debt union …The SPD feared this debate and the dominant public opinion’ (personal interview, 19 December 2017). First and foremost, the SPD made policy on the basis of opinion polls rather than its economic convictions (Michael Dauderstädt, personal interview, 5 November 2017; Dierk Hirschel, personal interview, 15 December 2017). Thierse was critical of this approach in retrospect, but he emphasized that the perception was that we can neither enforce Eurobonds in our own country nor Europe …How long do you fight for something in the clear awareness that you can only lose this fight? One should not demand that a political party should walk directly into defeat with its head held high. (Personal interview, 7 September 2016)

This reveals a very instrumental view among SPD politicians: they prioritized electoral considerations over economic ones because they did not believe that it was in their power to change public opinion (political adviser, personal interview, 19 October 2017). As Binding explained, ‘the public discourse was so loaded with clichés and stereotypes that an honest discussion was not possible’ (personal interview, 23 November 2017). Instead, the party was always concerned about ‘the mood among the people and …what was written in the tabloid press. If the party had the feeling that a position was not popular, it was dropped due to concerns about the next election’ (Dauderstädt, personal interview, 5 November 2017). Given that in Germany’s federal system, the next important election was never far away, many programmatic decisions were taken ad hoc based on strategic considerations. As Christian Kellermann argued, most SPD politicians were ‘not interested in an academic, system-critical debate’ (personal interview, 17 December 2017). This path was charted by Sigmar Gabriel, who became the party leader in October 2009. He was a strategic opportunist who carefully listened to the public mood and opinion polls.3⁵ One adviser, who closely worked with Gabriel, argued that ‘he never gave much thought to any economic theory’ (economic adviser D, personal interview, 19 December 2017); another economic adviser recalled that ‘he often followed the majority opinion rather than trying to find a consistent approach’ (economic adviser A, personal interview, 31 January 2018). Gabriel did not have a clear economic line and in 3⁵ Gabriel even made his decision to step down as party leader in January 2017 with reference to an opinion poll, which he had commissioned. This style of making decisions was representative of his entire tenure as party leader.

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the context of the eurozone crisis, he alternated between opposing positions on several occasions. For example, when—with Steinmeier and Steinbrück— he once again proposed Eurobonds in the summer of 2011, the SPD received sharp criticism in the media and fell again in the polls. In response, Gabriel did not dare to stick to his pro-European position and reverted to German orthodoxy.3⁶

The economics of austerity The SPD also lacked the necessary convictions with which to challenge austerity.3⁷ Since 1959, the party has historically been associated with Keynesianism, and an appreciation for Keynes still exists within the party today. Even Johannes Kahrs, who was the head of the so-called Seeheimer Kreis (the right wing of the SPD), agreed with Keynes’s theory; he argued that ‘governments should spend in bad times but in good times they should save so that they can invest in bad times’ (Johannes Kahrs, personal interview, 16 August 2016). Some elements of Keynesianism also influenced the party in the wake of the financial crisis and, eventually, contributed to the stimulus packages that the SPD supported and implemented as part of the grand coalition. However, in the decades before the crisis, the SPD had already been strongly influenced by economic ideas that can be described as supply-side Keynesianism. The SPD’s support for the austerity settlement was legitimized among social democratic politicians by several tenets of this ideational framework. As with the British Labour Party, there were clear limitations to the SPD’s faith in the growth potential of demand management, which had been largely abandoned by the party after Oskar Lafontaine’s departure from government in 1999 (economic adviser B, personal interview, 15 March 2018). Although the SPD supported the fiscal stimulus in 2008 and 2009, these packages did not mark a return to a more comprehensive form of demand management. As shown earlier, initially Peer Steinbrück even criticized the stimulus programmes in the UK and elsewhere. Due to the size of the economic shock, the SPD ultimately supported two stimulus programmes, but—in line with New Keynesian ideas—the party leadership believed that the demand stimulus should only be a short-term remedy to the crisis (Dierk Hirschel, personal 3⁶ Another economic adviser recollected: ‘Sigmar Gabriel himself had no clear idea of economic policy and was very much guided by what he perceive[d] to be well received in the surveys and [what was] accepted by the mainstream press’ (economic adviser A, personal interview, 31 January 2018). 3⁷ This section partly draws on an article written jointly with Sean McDaniel that was published in the Socio-Economic Review (Bremer and McDaniel, 2020).

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interview, 15 December 2017). Furthermore, it not only justified the stimulus with the necessity of stimulating domestic demand, but it argued that the government had to intervene to ensure the long-term productivity of the economy (e.g. SPD, 2009). The SPD, therefore, quickly moved away from calls for further demand stimulus as the economy returned to growth again. Especially since German unemployment remained relatively low during the crisis, there was a feeling that additional fiscal stimulus was not needed to support the recovery (Christian Kellermann, personal interview, 18 December 2017). At the same time, influenced by the long-standing German tradition of a strong and independent central bank, leading SPD politicians were convinced that macroeconomic policy should be left to monetary policy during the crisis period (Gustav Horn, personal interview, 14 November 2017). The SPD leadership never questioned the independence of the European Central Bank (ECB) and was quiet when other political actors in Germany started to criticize the bank’s expansive monetary policy. It understood that monetary policy measures were not only necessary but also contributed significantly to the stabilization of Europe (Dierk Hirschel, personal interview, 15 December 2017). For example, Carsten Schneider, the spokesperson for economic policies, argued: ‘we Germans know very well that the independence of monetary policy is a great asset that must be protected: protected against external attacks and political influence’ (Schneider, 2017).3⁸ Despite the SPD’s support for a European growth and employment pact, the party was not convinced that there was a need to shift from monetary dominance towards a different macroeconomic policy mix and remained unwilling to embrace a large European-wide fiscal effort. The strongest argument for fiscal consolidation within the SPD was based on the notion that it was necessary to ensure the long-term capacity of the state. Since the early 2000s, leading SPD advisers and politicians had argued that consolidating government debt should be a priority. For example, in 2002, Carsten Schneider, a young MP, and Jörg Asmussen, then the chief of staff of Finance Minister Hans Eichel, wrote a joint position paper in which they argued: ‘saving is not an end in itself. It is a step towards a viable state. It is about creating capacity for an activating state’ (Schneider and Asmussen, 2002, p. 8).3⁹ This view gained traction during the eurozone crisis, as leading politicians from the Seeheimer Kreis pushed the progressive consolidation thesis. 3⁸ Author’s translation; original: ‘ Wir Deutschen wissen ganz besonders, die Unabhängigkeit der Geldpolitik ist ein hohes Gut, das wir schützen müssen: Schützen vor äußeren Angriffen und politischer Einflussnahme’. 3⁹ Author’s translation. Original: ‘Sparen ist kein Selbstzweck. Es ist ein Schritt hin zu einem handlungsfähigen Staat. Es geht darum, Gestaltungsfähigkeit für einen aktivierenden Staat zu schaffen.’

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This thesis even resonated with some people from the left wing of the party and found support among the party leadership because it could easily be combined with an argument about generational justice. For example, Kahrs (personal interview, 16 August 2016) argued, ‘higher debts are a burden on future generations, and it is not fair, from the point of view of generational justice, that we burden future generations with debts that take away all room for manoeuvre’. Similarly, Joachim Poß (personal interview, 22 September 2016) contended: ‘there are good reasons that the state gives itself room for manoeuvre: the lower the debt, the higher the ability to act’. Arguments about generational justice allowed the SPD to internally legitimize fiscal consolidation on its own terms. When confronted with arguments about the lack of investment in Germany, the SPD struggled to develop a clear policy. As was the case of the British Labour Party, a large part of the SPD had endorsed the Third Way in the early 2000s, accepting that the welfare state should become a social investment state. In the wake of the crisis, the party thus tried to push for more investment—in both human and physical capital. Higher investment in education and childcare was seen as key to increasing the productivity of the economy and Sigmar Gabriel, then party leader and economics minister, actively promoted this policy. Constrained by its coalition partner, however, the SPD was reluctant to call for a large increase in government spending. Despite extremely low interest rates on German government bonds, which would have allowed the government to finance public investment programmes cheaply (as shown in Figure 7.7), the party was extremely hesitant to question the Schwarze Null. Influenced by the eurozone crisis, which created an environment where the public consensus against government spending and debt was extremely strong (e.g. Thorsten Schäfer-Gümbel, personal interview, 13 December 2017), the SPD denounced government debt and remained wedded to supply-side Keynesianism. By adopting supply-side Keynesianism, the centrist wing within the SPD abandoned Keynes’s view that any form of demand stimulus is better than no stimulus. In the words of Carsten Schneider (personal interview, 20 October 2016), ‘the SPD does not want to build lighthouses that do not have light’. The party’s leadership still believed that ‘structural problems, and downturns in the economic cycle, need to be addressed with government spending, but one cannot spend for spending’s sake’ (Johannes Kahrs, personal interview, 16 August 2016). In the context of the eurozone crisis, these ideas also made the party sympathetic to the view that the crisis could not be solved with additional government spending. Instead, the debtor countries needed to follow the German example by implementing productivity-increasing reforms.

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In the words of Steinberg, the SPD did not support ‘vulgar’ Keynesianism; instead, ‘the SPD is concerned about both demand and supply. Sigmar Gabriel always said “God has given people two arms and not just one”. In other words, the SPD [was] always concerned with both supply-side and demand-side instruments’ (personal interview, 22 November 2017). Thus, supply-side Keynesianism undermined the party’s ability to speak out against orthodox economic policies. One SPD adviser (economic adviser C, personal interview, 18 August 2016) put this in the following way: Ideologically, the SPD is not close to ordoliberalism, but it lacks the intellectual rigour to question German dogmatic positions. For most of its history, the party did not have a clear economic and social programme. And even when it had a clear policy, this was often inspired by supply-side economics rather than demand-side economics.

The SPD trapped and divided In the context of the economic crisis, the SPD party initially tried to renew its economic programme. Following the 2009 election and the SPD’s historic loss, Sigmar Gabriel installed an economic commission, as described

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earlier. The commission included a wide range of advisers, including several Keynesian economists.⁴⁰ However, from 2010, when the European sovereign debt crisis was unfolding, the party leadership was not focused on developing long-term strategies: ‘After the election defeat in 2009, the SPD was willing to debate a new economic policy programme, but this willingness disappeared relatively quickly’ (economic adviser A, personal interview, 31 January 2018). Instead, the SPD leadership only reacted to the recurring crises, closely following public sentiment in developing their response (Michael Dauderstädt, personal interview, 5 November 2017). As one economic adviser explains, ‘this meant that many of the radical proposals were off the table relatively quickly and the SPD, instead, chose sound bites and positions that seemed acceptable to the German public’ (economic adviser A, personal interview, 31 January 2018). The SPD was also unable to oppose the prevailing public discourse in Germany and push for an ideational renewal because it was unsettled by its recent past. Agenda 2010 had destabilized the party and alienated a large part of its core clientèle. The reforms exaggerated changes in the make-up of the SPD’s electorate and fuelled the rise of Die Linke (Schwander and Manow, 2017). Like many other social democratic parties, the SPD had lost the support of many working-class voters and its relationship with the unions had been undermined. Instead, the party was increasingly supported by middle-class voters (Gingrich and Häusermann, 2015; Kitschelt, 1994), who also tend to be more fiscally conservative. The reforms strengthened the narrative that the SPD could only win elections from the centre, which made it more difficult for it to oppose austerity. This electoral trap was exacerbated because the SPD was internally divided about the legacy of Agenda 2010. In 2003, the party leadership dared to push through the reforms without the support of the public or their own party members. Afterwards, the SPD was wary of policies and positions that might go against the perceived majority opinion in Germany, which also influenced it in the context of the economic crisis. The party constantly hedged and was unwilling to take a clear stance against the conservative position. Instead, party leaders were concerned with minimizing their exposure to possible attacks by their political opponents. They were ‘haunted by the reputation that social democrats cannot deal with money’ (Björn Hacker, personal interview, 18 August 2016). ⁴⁰ Reflecting this, Hirschel argued, the problem was ‘not a lack of ideas, but a lack of political will to implement these ideas’ during the crisis (personal interview, 15 December 2017).

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Moreover, the SPD was caught in an ideational trap due to path dependency. The departure of Lafontaine from the party at the turn of the century had already discredited Keynesian demand management in the SPD (economic adviser A, personal interview, 31 January 2018). Since then, the ‘dominant German narrative that sovereign debt is bad had become firmly established in the party, which undermined Keynesian arguments during the crisis’ (economic adviser B, personal interview, 15 March 2018). As we have seen, this position became more ingrained, as Germany emerged from the recession more quickly than most other European countries. Germany’s liberal supply-side reforms from the early 2000s were increasingly seen as the reason for the country’s recovery (Gustav Horn, personal interview, 14 November 2017). As many people from the Schröder era were still in positions of influence within the party and leadership, they defended the Agenda’s legacy. The perceived success of these supply-side reforms entrenched the notion that the economic crisis in Europe should be addressed by structural reforms and supply-side policies rather than by traditional Keynesian demand management. It crowded out actors and ideas that were more supportive of a more expansionary fiscal strategy beyond 2009. Furthermore, Agenda 2010 also exposed the divisions within the SPD. The different factions within the party evaluated the legacies of the liberal reforms differently and disagreed about the lessons for the future that could be learned from them. These divisions were still salient in the context of the Great Recession. There were ‘fierce debates within the party’ (Stegner, personal interview, 19 December 2017) as the left wing made a plea for Keynesian stimulus programmes, while the right believed that such policies would not work. Importantly, the right wing of the party always maintained the upper hand in these discussions. Most leading (budgetary) politicians were from the influential Seeheimer Kreis—the centrist faction of social democratic MPs—which influenced the party’s position. As the European sovereign debt crisis unfolded, it further legitimized their arguments for orthodox fiscal policies and marginalized the calls for further German as well as European-wide demand stimulus.

Conclusion In conclusion, the SPD’s fiscal policies in the context of the Great Recession were largely driven by electoral calculus and distinct economic ideas.

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On the one hand, the party’s fiscal policies became part of an electoral strategy that the party had inherited from its recent past. Assuming that elections are won in the centre, the SPD tried to win over fiscally conservative voters. Therefore, it did not challenge the prevailing public sentiment and common wisdom in Germany that is extremely critical of debt. On the other hand, this would have been an unlikely course of action for the party anyway because the centrist wing of the SPD was influenced by economic ideas that undermined its commitment to traditional social democratic fiscal policies. In the tradition of supply-side Keynesianism, the party had already championed supply-side policies before the Great Recession. As these policies helped Germany to come through the recession relatively unscathed, so the argument went, they undermined the ability of traditional Keynesians inside and outside of the SPD to argue for demand stimulus beyond 2009. This limited the left’s freedom to challenge the dominant narrative of the eurozone crisis, which blamed excessive government spending by the debtor countries for Europe’s malaise. The SPD, instead, endorsed fiscal orthodoxy, denounced debt, and joined the chorus of austerity. In the long term, this acceptance of fiscal orthodoxy was bad politics, independent of the economics (as further discussed in Chapters 8 and 9), because it undermined the party’s ability to present a coherent economic policy following 2008. While the SPD supported some distinctively leftwing policies in some areas, including the so-called Kurzarbeitergeld and the minimum wage, ‘the baseline position was not clear enough’, as Thorsten Schäfer-Gümbel—a former deputy leader of the SPD—maintained (personal interview, 13 December 2017). The SPD lacked a clear economic profile and its adoption of an orthodox fiscal framework was often incompatible with other economic policies, which diluted the party’s brand. Moreover, the party’s fiscal orthodox policies undermined its ability to distinguish itself from the CDU/CSU. By imitating its opponent’s fiscal policies, it tried to be plus royaliste que le roi (‘more royalist than the king’). This turned fiscal consolidation into a valence issue, which played into the hands of the CDU/CSU. The SPD struggled to win the battle over fiscal competence with the CDU/CSU, which owned the issue and is widely perceived as more competent in cutting deficits and government debt. Admittedly, the SPD’s strategic position was also difficult because of Angela Merkel’s leadership of the CDU/CSU. After 2005, that party shifted its position on the welfare state markedly towards the left, as shown earlier. It neutralized much of the SPD’s programme on welfare and economic liberalism in the centre. This squeezed the SPD’s strategic space on the economic dimension, which was simultaneously challenged by the rise of Die Linke on the left. The high personal

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approval ratings for Angela Merkel helped her party to win among centrist voters, which defied the SPD’s electoral strategy. Nine years after the beginning of the Great Recession, these factors contributed to the defeat of the SPD in the federal election of 2017, when the party did even worse than in 2009. Accepting the dominant fiscal and economic framework of the CDU/CSU, the party was still unwilling to introduce more radical economic policies (e.g. tax increases for the rich, a large public investment programme) that could have given it a new profile. These policies directly result from the core ideology of the centre-left: if social democracy has any meaning, it is the belief that the government can intervene in markets to improve people’s livelihoods. Austerity challenged this core belief and undermined the electoral appeal of social democratic parties. Although the SPD attempted to campaign on a platform that put social justice front and centre, it lacked a coherent vision that could challenge the dominant conservative economic discourse in Germany in the aftermath of the Great Recession.

Appendix: list of all German interviews I selected my interview partners by combining a ‘purposive sampling method with a ‘chain’ or ‘snowballing’ sampling method. I first tried to identify the key politicians and policymakers that influenced the response of the SPD to the Great Recession. Second, I encouraged my initial respondents to suggest other people relevant to answer my research question. In this way, I tried to identify influential players who were not obvious ex ante. Based on this reasoning, I conducted interviews between August 2016 and March 2018 with the following twenty-one policymakers. The list includes their most relevant position(s) during the period that this book focuses on (2008–15)⁴1: • Anonymous, adviser to the SPD parliamentary group in the Bundestag, Berlin • Lothar Binding, former MP and spokesperson for financial affairs of the SPD parliamentary faction, Berlin • Michael Dauderstädt, former head of the Economic and Social Policy department of the Friedrich-Ebert-Stiftung, Berlin • Sebastian Dullien, Academic Director of the Macroeconomic Policy Institute (IMK) and economic advisor to the SPD, Berlin ⁴1 Some of these individuals agreed to be listed by name but preferred to be cited anonymously in the text.

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• Henrik Enderlein, Professor of Political Economy at the Hertie School of Governance and economic advisor to the SPD, Florence • Andrä Gärber, head of the Economic and Social Policy department of the Friedrich-Ebert-Stiftung, Berlin • Heiko Geue, former head of Political Staff at the Federal Ministry of Finance, Berlin • Björn Hacker, Professor at the HTW Berlin University of Applied Sciences and former analyst at the Friedrich Ebert-Stiftung, Berlin • Dierk Hirschel, Chief Economist at ver.di United Services Trade Union and member of the Commission for Fundamental Values of the SPD, Berlin • Gustav Horn, Professor of Economics, University Duisburg-Essen and former Academic Director of the Macroeconomic Policy Institute (IMK), Berlin • Johannes Kahrs, former MP and budgetary spokesperson of the SPD parliamentary group, Berlin • Christian Kellermann, former adviser to the SPD’s executive board and head of the economic policy unit of the SPD, Berlin • Joachim Poß, former MP and deputy chairman of the SPD parliamentary group responsible for economic affairs, Berlin • Thorsten Schäfer-Gümbel, former deputy leader of the SPD, Wiesbaden • Carsten Schneider, MP and former Secretary of the SPD parliamentary group and Deputy Chairman of the SPD parliamentary group responsible for economic affairs, Berlin • Gesine Schwan, head of the Commission for Fundamental Values of the SPD, Berlin • Ralf Stegner, former deputy leader of the SPD, Berlin • Philipp Steinberg, Director-General for Economic Affairs at the Federal Ministry of Economic Affairs and Energy and former senior adviser to SPD Chairman Sigmar Gabriel, Berlin • Gerald Steininger, senior adviser on financial affairs of the SPD parliamentary group, Berlin • Wolfgang Thierse, former President of the Bundestag and deputy chairman of the SPD, Berlin • Kerstin Villalobos, senior adviser on European politics of the SPD parliamentary group, Berlin

8 The Electoral Effects of Social Democratic Austerity Introduction Chapter 1 argued that most social democratic parties in Europe accepted austerity as the dominant fiscal policy in Europe in response to the Great Recession. Echoing the policy debates of the 1980s, TINA—there is no alternative—became the catchphrase of economic policy once again. This ushered in an ‘austerity settlement’ which persisted for almost a decade. Chapters 4 to 7 interrogated the causes of social democratic parties’ puzzling support of the austerity settlement. The analysis showed that social democrats had strategic and ideational reasons for supporting orthodox fiscal policies and that these reasons were entangled with each other in a complex way. In the end, both Chapter 6 and Chapter 7 suggested that these parties’ strategies to increase their perceived economic credibility and competence failed in both Germany and the UK. However, it remains unclear whether this is a systematic pattern. This chapter, therefore, investigates the electoral consequences of social democratic austerity. To what extent did social democratic parties suffer or benefit from accepting austerity during the Great Recession? The question is important because the existing literature is divided on the electoral payoffs for the mainstream left of moving towards the right. On the one hand, a large literature finds that mainstream parties benefit from moderating their position and moving towards the centre (e.g. Abou-Chadi and Orlowski, 2016; Adams and Somer-Topcu, 2009; Ezrow, 2005). Based on a Downsian logic, it is assumed that this allows parties to broaden their electoral appeal by moving closer to the median voters (Downs, 1957). On the other hand, other research suggests that centrist strategies hurt centre-left parties. Evidence from a range of European countries shows that social democracy lost support as a consequence of its adoption of the Third Way (e.g. Arndt, 2013; Karreth et al., 2013; Schwander and Manow, 2017), which alienated the centre-left’s traditional support base and created space for challenger parties to emerge. Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0008

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To examine the electoral consequences of social democratic austerity during the Great Recession, this chapter combines two empirical approaches. First, it uses time-series-cross-section (TSCS) analysis to trace the effect of austerity packages in twelve Western European countries on support for social democratic parties in monthly opinion polls from 2005 to 2017. Second, it uses panel data from the British Election Study (BES) to analyse the impact of individual-level attitudes on the propensity to vote for the Labour Party in the 2015 UK election. The results from the time-series analysis show that across the twelve European countries studied, social democratic parties, on average, lost support when they implemented austerity policies during the Great Recession. The results from the BES demonstrate that this was driven by two individual-level mechanisms. The Labour Party’s core voters oppose austerity, while potential voters who are fiscal conservatives are unlikely to support the Labour Party even if it adopts orthodox policies. The results thus confirm that adopting austerity is bad politics for the centre-left, independent of the economics (also see Chapter 9). Next, I will set out some theoretical expectations about the impact of austerity on support for social democratic parties in the context of the Great Recession. I will then test these expectations on the aggregate and individual levels in two steps, by combining time-series analysis and individual-level panel data, as described above. Finally, this chapter discusses the results of both analyses and highlights their wider implications, which will also be taken up again in the Conclusion.

The contested electoral payoffs of centrist strategies As we have seen in Chapter 1, social democratic parties have been struggling for several decades with the prospect of decline in advanced economies. In the 1970s, repeated economic crises and the occurrence of stagflation challenged the existing economic consensus, which had been built around state intervention and welfare state expansion. In the absence of broad-based economic growth that could sustain higher rates of profit for capital and higher living standards for labour, the class compromise that had emerged after the Second World War was undermined. The end of the so-called trente glorieuses, or the golden age, also coincided with the rise of large, structural transformations which hurt social democratic parties. Deindustrialization, technological change, and educational expansion reduced the size of the traditional working class and contributed to a

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decline of traditional class voting and to electoral realignment (e.g. Evans and Tilley, 2017; Knutsen, 2004; Oesch and Rennwald, 2018). This electoral realignment made it more difficult for social democratic parties to build winning electoral coalitions. However, parties are not simply victims of structural conditions; they are also agents of their own fate. Parties operate in a strategic environment and can move in the political space to forge (new) electoral coalitions between different electoral constituencies. As the traditional constituency of social democratic parties shrank, centre-left parties increasingly appealed to voters from the expanded middle classes (Gingrich and Häusermann, 2015; Häusermann, 2018; Kitschelt, 1994). Therefore, many social democratic parties modernized their programmatic offer towards the end of the twentieth century by moving towards the centre. A large body of literature suggests that such centrist strategies lead to electoral success for mainstream parties. According to Anthony Downs’ median voter theorem (Downs, 1957), it is commonly argued that mainstream parties have an incentive to moderate their positions and converge in the centre. Based on the assumption that voters are located in the middle of the ideological spectrum, and that they support the party closest to their own position, centrist strategies are thought to be vote-maximizing. Evidence shows that such strategies are generally successful (Somer-Topcu, 2015) and that ideological moderation boosts a party’s perceived competence (Johns and Kölln, 2020). Mainstream parties thus follow shifts in the preferences of the median voter, rather than those of their support base (Ezrow et al., 2011). They stay closely tuned to the dominant policy mood (Erikson et al., 2002) or the ebb and flow of public opinion (Soroka and Wlezien, 2010), carefully crafting their programmes with reference to strategic considerations. Still, there is also evidence that centrist economic policies have adverse consequences for social democratic parties in the medium to long run. By appealing to the expanded middle classes, social democratic parties risk losing the support of their traditional clientele, the working class. Karreth et al. (2013, p. 792) use individual-level evidence from Germany, Sweden, and the UK to show that ‘gains from the policy shift towards the middle in the 1990s were short-lived and came at the expense of electoral success in the subsequent decade’. They argue that centrist policies appeal to voters in the centre, who may be easy to gain but difficult to keep, while they alienate core voters. Similarly, Schwander and Manow (2017) show that, in Germany, Agenda 2010 created space for a national challenger party on the left (Die Linke). It helped to entrench that party in the German party system because the Third

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Way undermined the close relationship between the working class and the SPD (also see Arndt, 2013; Horn, 2021; Loxbo et al., 2021; Polacko, 2022). In the context of the Great Recession, it is also likely that austerity hurt social democratic parties. First, those parties overestimated the support for fiscally conservative policies among the electorate. As Chapter 4 showed, a large majority of voters, in principle, favour lower government debt. Given that voters’ individual experiences of the economy influence their level of debt aversion, they may equate the government budget with that of a private household, which cannot borrow indefinitely without running into financial problems. Still, Chapter 5 shows that fiscal consolidation is not a priority for voters when one takes into account the budgetary trade-offs that governments face. Therefore, the share of fiscally conservative centrist voters that social democratic parties could appeal to by supporting austerity was smaller than they had assumed (see Chapters 6 and 7).1 Second, accepting austerity was harmful because it contributed to inconsistencies within the centre-left’s economic programme, as Chapter 3 showed. Although implementing fiscal consolidation may be politically risky for all governing parties (Bojar et al., 2022; Jacques and Haffert, 2021), the electoral costs may be particularly heavy for the centre-left. Parties are often compared to brands, and their brand identity is formed on the basis of what their representatives say and do over time (Aldrich, 1995; Cox, 1997; Lupu, 2016). These ‘brands’ provide clarity about parties’ intentions and identity and facilitate voters’ choices by giving them clear options (Dalton et al., 2011; Ezrow et al., 2014). Historically, social democratic parties have been associated with Keynesianism (Hall, 1989; Przeworski, 1985) and have styled themselves as the protectors of the working class (e.g. Esping-Andersen, 1985). In the wake of the financial crisis, the centre-left maintained its support for the welfare state, but it did not show what this meant in practice. By accepting austerity, it helped to shift the burden of the crisis to the weakest members of society. This facilitated a process of brand dilution (Lupu, 2016): it undermined the partisan attachment of the parties’ ‘core voters’ and created a feeling that social democracy had become an empty and obsolete term. Third, by accepting austerity, social democratic parties effectively turned fiscal consolidation into a valence issue (Stokes, 1963). They attempted to neutralize the topic by imitating their political opponents. In hindsight, however, this strategy backfired. In the short run, they were unable to reduce the salience of debt because the crisis was widely interpreted as a sovereign debt 1 This is also supported by increasing evidence that demonstrates that fiscal consolidations can be politically costly; see discussion in Chapter 4.

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crisis. In this context, the centre-left could not win by moderating its position because it did not own the issue (Budge and Farlie, 1983; Petrocik, 1996; Van der Brug, 2004). Rightly or wrongly, social democratic politicians are often perceived as less competent when it comes to managing public finances. Social democratic austerity thus gave the centre-right a strategic advantage because it enabled it to claim that austerity was necessary, vindicated by the left’s support, and that it was the best at implementing it. Put differently, by supporting fiscal consolidation, the centre-left joined a game that it could not win: no matter how frugal social democrats promised to be, the centre-right always put the bar a little bit higher. This only pushed potential voters at the centre of the political competition (who were concerned about the budget) towards voting for the moderate right. Therefore, I assume that social democratic austerity had adverse electoral consequences for the centre-left during the Great Recession, even though it was informed by strategic considerations. In all likelihood, social democratic parties lost support when they were in government and implemented austerity. They may have benefited from austerity when they were in opposition and the governments they opposed were implementing it, but this effect was weakened by social democratic parties’ support for austerity even when they were in opposition (see Chapters 6 and 7). The aggregate losses can be explained by voters’ individual-level behaviour. Specifically, I would expect that ‘potential’ centrist voters who were concerned about the budget deficit were less likely to vote for social democratic parties than people who were not, because these parties do not own the issue. In contrast, voters who were opposed to spending cuts and/or tax increases may still have been more likely to vote for social democratic parties than those who supported austerity policies. However, by adopting austerity, social democratic parties alienated these ‘core’ voters and lost them too.

The effect of austerity packages on support for social democratic parties across Europe Data and methods I first rely on monthly vote intention data to test the impact of austerity policies on support for social democratic parties in twelve Western European countries. The data was systematically collected from several different polling companies in each country (see Bojar et al., 2022). Beyond the constraints of polling data availability, the countries were selected to include

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Figure 8.1 Support for social democratic parties in twelve Western European countries, 2005–17 Note: The figure shows the average monthly support for social democratic parties; this is sometimes called the ‘poll of polls’. For any given month, it is usually based on observations gathered by several different polling companies.

a representative sample of countries that had implemented austerity policies during the Great Recession. They include countries from northern (Denmark, Finland, Iceland), western (Ireland, the UK), continental (Austria, Germany, Netherlands), and southern Europe (Greece, Italy, Portugal, Spain). The countries vary on several dimensions, such as GDP per capita, external imbalances, creditor–debtor position within the European Union (EU), welfare state regime, political institutions, and perhaps most importantly, the severity of the financial and economic crisis that they experienced from 2008 onwards. Subject to data availability, the country series begin in 2005 and end in 2017, as shown in Figure 8.1. This ensures that the series cover both the pre-crisis and post-crisis periods. The main advantage of using vote intention data is that it provides the opportunity to track immediate aggregate-level changes in the electoral

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prospects of social democratic parties in response to austerity packages. To identify and measure the timing of austerity packages, I gathered information from three international newspapers: the Financial Times, the New York Times, and the Neue Züricher Zeitung (see Earl et al., 2004 for a methodological review).2 Based on the systematic coding of these newspapers, I estimate the timing at which governments announced austerity packages after the 2007–8 financial crisis. As a general rule, I coded the ‘occurrence’ of this event as the month when the government first announced it. Party elites and media frames likely start influencing electoral preferences upon the initial announcement of such measures, making that the appropriate time point for the analysis to begin.3 In my analyses, I model the influence of austerity packages on support for social democratic parties through time-series analysis. To this end, I treat austerity packages as intervention variables to the underlying popularity time series of social democratic parties (McCleary et al., 1980; Pankratz, 1991). Lacking a clear theoretical prior about the functional form of austerity packages, I model austerity in three different forms: (1) as a pulse function which models the impact of austerity as an immediate spike in one month; (2) as a step function which models it as a three-month level shift; and (3) as a step function which models it as a six-month level shift. In other words, I use different time windows of multiple lengths and allow for short-term (one month), medium-term (three months), and long-term (six months) effects in the electoral response to austerity. In cases where multiple austerity periods occur within the same window, I simply extend the window beyond the last austerity episode by the same window length. As Figure 8.1 shows, the time series for the dependent variable is clearly non-stationary in most countries, which presents difficulties for valid inference because of the high risk of spurious regressions (De Boef, 2001; Enders, 2004). Yet, non-stationarity is a common feature of vote intention data due to the highly persistent nature of partisan attachments, implying that political shocks have a long memory. A series of unit-root tests thus yielded clear evidence that non-stationarity was present in most of the country series. To address this issue, I use the first difference of vote intention as the dependent variable, which is a standard fix. The resulting time series are non-stationary

2 These three newspapers were chosen because all of them have a long-standing reputation in international reporting and, except for the Financial Times, they are from ‘neutral’ third countries that are not covered by this study. I included the Financial Times because it has the broadest coverage of international economic affairs. 3 Recent work has highlighted the role of party elites (Bisgaard and Slothuus, 2018) and media frames (Barnes and Hicks, 2018) in shaping fiscal preferences.

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in all countries, as shown in Online Appendix D and confirmed by another round of unit-root tests. I then estimate the intervention function via OLS regressions that include country-fixed effects and clustered standard errors. These regressions model the first difference in support for social democratic parties as a function of the level of support in the previous period and an interaction term between austerity (as defined above) and an incumbency dummy variable. The incumbency dummy simply measures whether social democratic parties were in government or opposition when a given austerity package was implemented.⁴ Note that my preferred modelling choice is a set of pooled time-series models with country-fixed effects and clustered standard errors to account for unobserved heterogeneity across countries. The results are also robust to other modelling choices, including random-effects and mixed-effects models.

Results The results of the time-series analysis indicate that austerity is not systematically related to the support for social democratic parties shown in polls of monthly vote intentions across Western Europe (see Online Appendix D). Yet, there is no reason to expect that all austerity packages have a systematic influence on the popularity of social democratic parties, regardless of whether these parties implement austerity or not. Rather, it is necessary to test whether there is an interaction effect between incumbency and austerity. The results are shown in Figure 8.2, which plots the average marginal effect of austerity packages on support for social democracy by incumbency status. The left-hand side shows results from simple regression models, excluding other covariates. It indicates that austerity packages have a negative effect on support for social democratic parties when they are in government. The effect is largest when austerity is operationalized as a one-month intervention, but it also persists when austerity is operationalized as a three- and a six-month intervention window. In the short run, social democratic parties lose, on average, one percentage point of support after implementing a given austerity package. Given that governments often implemented several austerity packages within a few months, this estimated effect of an individual package is substantial.

⁴ See Appendix D for the detailed model specifications for the regression analyses used in this chapter.

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Figure 8.2 Average marginal effect of austerity on support for social democratic parties by incumbency Note: The figure shows average marginal effects and 95 per cent confidence intervals. The control variables included in the analysis on the right include monthly retail sales growth, inflation, and political variables that control for electoral dynamics (e.g. campaign, honeymoon, election month). All models include country-fixed effects, and confidence intervals are calculated with clustered standard errors. The full regression tables are shown in Online Appendix D.

The graph also indicates that austerity tends to have a positive impact on the popularity of social democratic parties when they are in opposition, but this effect is smaller and not statistically significant. Given that some social democratic parties had also supported fiscal consolidation when they were in opposition, this is not necessarily surprising. It was often other opposition parties that had led the charge against austerity and that thus gained in popularity when governments cut spending and raised taxes. The right-hand side of Figure 8.2 replicates the analysis but adds control variables to the regression model. It shows that the results are robust towards the inclusion of several control variables that could also influence the support for social democratic parties in monthly opinion polls. These variables include monthly economic growth (as proxied by the year-onyear (y-o-y) change in retail sales volume) and inflation, as well as political variables that control for specific electoral dynamics (e.g. campaign, honeymoon period of a new government, election month). Overall, the inclusion of these variables does not change the result. The estimated marginal effects remain almost identical to those of the simple models without control variables.

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Support for austerity and propensity to vote for the Labour Party on the individual level in the UK Data and methods Up to this point, this chapter has focused on the aggregate level. It has shown that, on average, social democratic parties lost in popularity after implementing austerity packages when they were in government, while there was a weak tendency for them to benefit from these policies when they were in opposition. Yet, it is not clear what the individual-level mechanisms are. Why do social democratic parties lose support when they endorse austerity, even though existing research suggests that mainstream parties benefit from moderation? To address this question, I move away from the effect of specific policies that governments have implemented and study electoral dynamics. Specifically, I extend the analysis by using the BES. The BES included a panel component before the 2015 general election in the UK, which provides multiple observations for a large sample of UK voters. Following Barnes and Hicks (2019), this allows me to model the relationship between attitudes towards spending cuts and the public deficit on the one hand and the self-reported propensity to vote for the Labour Party on the other hand.⁵ It provides information about which voters are more likely to move to or abandon social democratic parties when these parties adopt orthodox fiscal policies. As argued in Chapters 1 and 6, the UK is an important case to study for several reasons. On the one hand, the UK government implemented austerity voluntarily in 2010. Unlike the cases of crisis-ridden countries like Greece, Ireland, and Portugal, the UK government was neither forced by external actors (such as the International Monetary Fund (IMF) or the EU) nor by financial markets to pursue fiscal consolidation. The UK has an independent central bank and faced low borrowing costs throughout the crisis. Still, the Conservative and Liberal Democrat coalition government announced deep austerity policies shortly after it was elected in May 2010. On the other hand, in hindsight, it has become clear that the social and political consequences of austerity in the UK have been severe: they undermined the welfare state, contributed to the rise of Jeremy Corbyn as the leader of the Labour Party, and can be linked to voting behaviour in the Brexit ⁵ Barnes and Hicks (2019) used the same data but focused on the propensity to vote for the Conservative Party as their main dependent variable.

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referendum of 2016 (Fetzer, 2019). Still, in the aftermath of the financial crisis, the Labour Party supported austerity for strategic and ideational reasons, as Chapter 6 highlights. The UK is thus an important case study in terms of helping us to understand why this strategy did not work; that is, why austerity had negative electoral consequences for the centre-left in the context of the Great Recession. The BES online panel includes information that can be used to examine the effects of Labour’s strategy. The panel is comprised of several waves and each wave contains around 30,000 individuals. It started in March 2014 and included six waves from before the 2015 general election.⁶ Wave-to-wave retention is at around 80 to 90 per cent and in total 17,008 respondents took part in all waves before the general election. In each wave, respondents were asked about their propensity to vote for each of the main UK parties (‘How likely is it that you would ever vote for each of the following parties’). Responses were recorded on an eleven-point Likert scale where zero meant ‘very unlikely’ and ten meant ‘very likely’, and I use the responses for the Labour Party as my dependent variable. I use two questions from the panel that measure attitudes towards deficit reduction and spending cuts. The first question was included in waves 1–4 and 6 and went as follows: ‘Do you think that each of these has gone too far or not far enough? […] Cuts to public spending in general.’ ⁷ The second question was included in waves 4 and 6 only, but it specifically asked about attitudes towards the budget deficit: ‘How necessary do you think is it for the UK Government to eliminate the deficit over the next three years—that is, close the gap between what the government spends and what it raises in taxes?’⁸ The distribution of responses to both questions is shown in Figure 8.3. It shows that attitudes among people with a high propensity to vote Labour (above 5) are differently distributed than attitudes among people with a low propensity to vote Labour (equal to or below 5). To estimate the relationship between attitudes towards austerity and support for Labour, I first estimate OLS regressions that focus on the crosssectional differences across individuals but take into account that these individuals were surveyed multiple times. To this end, I use models with the

⁶ Wave 1 was conducted in February/March 2014; wave 2 in May/June 2014; wave 3 in September/October 2014; wave 4 in March 2015; wave 5 in April/May 2015; and wave 6 in May 2015, before the election. ⁷ The available response options for this question were: ‘Not gone nearly far enough’; ‘Not gone far enough’; ‘About right’, ‘Gone too far’; ‘Gone much too far’; ‘Don’t know’. ⁸ The available response options to this question were: ‘It is completely necessary’; ‘It is important but not absolutely necessary’; ‘It is not necessary but it would be desirable’; ‘It is completely unnecessary’.

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Figure 8.3 Distribution of attitudes towards spending cuts and the budget deficit by the propensity to vote for the Labour Party Note: The figure shows the distribution of answers to two questions included in the BES for people with a high and low self-reported propensity to vote for the Labour Party. The questions are: ‘Do you think that each of these has gone too far or not far enough? […] Cuts to public spending in general’ and ‘How necessary do you think is it for the UK Government to eliminate the deficit over the next three years—that is, close the gap between what the government spends and what it raises in taxes?’

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so-called ‘between estimator’, which regresses an individual’s average attitude towards spending cuts or the deficit, respectively, on their average propensity to vote for the Labour Party. The baseline model includes attitudes towards austerity and party identification (party ID) as independent variables, but I add a set of control variables C in subsequent models (including socio-demographic information, socioand egotropic economic evaluation measures, and political attitudes). I also include party identification as an explanatory variable to minimize the risk that there is reverse causation, i.e. that voters adopt attitudes advocated by their preferred party. To further corroborate the effect of these attitudes on support for the Labour Party, I also estimate fixed-effect regressions that only focus on variation within individual respondents. The advantage of these estimations is that they allow me to control for any time-invariant differences across individuals by incorporating individual fixed effects. Using fixed effects reduces the risk of omitted variable bias and is a central advantage of utilizing panel data. However, it is important to note that the individual waves of the panel are all relatively close together, given that different waves were asked within the span of a year. Especially for the question on the public deficit, which was only asked in waves 4 and 6, the number of individuals who vary in their vote propensity and deficit attitude is not large. Still, the waves track respondents’ opinions during the electoral campaign ahead of the general election in 2015, when Labour tried to increase its economic credibility. They thus provide important evidence about the individual-level mechanisms at play, but the results should be treated as conservative estimates.

Results Figure 8.4 shows the relationship between individuals’ attitudes towards the deficit and their propensity to vote for the Labour Party before the 2015 election. Respondents who think that deficit reduction is necessary or important are less likely to vote for the Labour Party than people who think that it is unnecessary (the reference category).⁹ In fact, there is a monotonically increasing pattern: people who are more concerned about the deficit are less likely to vote for Labour, and the higher two levels are statistically different from the reference category. In the baseline scenario, which only includes ⁹ Other ways to estimate the effect of attitudes across individuals might include simply pooling answers from all waves or only using answers from a single wave. The results remain extremely similar across these alternative specifications.

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Completely unnecessary

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Figure 8.4 Estimated effect of attitudes towards the budget deficit on the propensity to vote for the Labour Party Note: The coefficients and 95 per cent confidence intervals are estimated based on OLS regressions that use between-effect estimators. The full regression table and the same graph based on fixed-effect regressions are shown in Online Appendix D.

party identification as a control variable, the estimated effect for people who think that deficit reduction is completely necessary is -1.34, whereas it is -0.54 for people who think that deficit reduction is important but not absolutely necessary. Even people who answered ‘Don’t know’ are much less likely to vote for the Labour Party, which may be an indication that the party does not have issue ownership on fiscal consolidation. The results further indicate that these effects are stable across different models with additional control variables. The coefficients become a little bit smaller when two attitudinal questions are included in the analysis: attitudes towards redistribution, and evaluation of party competence on the most salient issue. Still, the effects remain substantial and statistically significant. This indicates that people who are concerned about the deficit are less likely to vote for the Labour Party than people who are not concerned about it. Note that the models control for party identification, which reduces the risk of reverse causation, i.e. that voters first decide on their propensity to vote for Labour and then adopt attitudes accordingly. Yet, there may still be an omitted variable that drives both attitudes towards fiscal policies and the propensity to vote for the Labour Party. To address this concern, I use fixed-effect regression models, as explained earlier.

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The fixed-effects regression results for the question about deficit reduction generally confirm these results (see Online Appendix D). They indicate that the effect of being concerned about deficit reduction is smaller, but it is important to note that the question was only included in two waves before the 2015 general election, which were fielded within two months of each other. The proximity of these two waves limits the variation among respondents. Yet, remarkably, the pattern is still similar to that observed in Figure 8.4. Respondents who updated their opinion during the campaign, indicating that deficit reduction was completely necessary in May 2015 even though they had believed that this was not the case in March 2015, also updated their propensity to vote for the Labour Party: independent of the exact model specification, they are now less likely to ever vote for Labour.1⁰ Figure 8.5 repeats the same analyses for the question about attitudes towards spending cuts. As expected, the effects are reversed: compared to people who think that the cuts have not gone anywhere near far enough (the reference category), every other attitude level has a positive effect on the propensity to vote for the Labour Party with the ‘between estimator’. In particular, people who think that the cuts have gone too far or much too far are much more likely to vote for the Labour Party: on an eleven-point Likert scale from 0 to 10, the estimated coefficient is around 2. Put differently, the propensity to vote for the Labour Party increases by more than 18 per cent. Again, this effect is stable across the different model specifications, and it is supported by results from fixed-effect regressions. Before the 2015 general election, the question about attitudes towards spending cuts was asked more frequently in the BES than the question about the deficit. Therefore, there is more variation within individuals over time, which can be leveraged (see Online Appendix D). The results suggest that, again, there is a monotonically increasing pattern to the coefficient estimates, and compared to the reference category, the highest three levels are statistically different. People who become more opposed to spending cuts are more likely to vote for the Labour Party. Again, this effect is stable across different model specifications. In summary, the data from the BES shows that people who care about the deficit were less likely to vote for the Labour Party. Even though the party adopted a fiscally orthodox framework and prominently included a budget responsibility lock on the first page of its manifesto, fiscally conservative voters still did not vote for it. Those with hawkish fiscal attitudes were especially

1⁰ Fixed-effect models automatically control for time-invariant characteristics of individuals, but they do not control for time-invariant aspects. Therefore, additional models include party identification and political attitudes, which may vary over time, as control variables.

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Figure 8.5 Estimated effect of attitudes towards spending cuts on the propensity to vote for the Labour Party Note: The coefficients and 95 per cent confidence intervals are estimated based on OLS regressions that use between-effect estimators. The full regression table and the same graph based on fixed-effect regressions are shown in Online Appendix D.

unlikely to vote Labour. In contrast, Labour supporters are more opposed to spending cuts, and these are the voters that are likely to turn away from social democratic parties when they implement such cuts. It is beyond the scope of this chapter to analyse whether a different fiscal stance on the part of the Labour Party could have changed the actual election result, but it seems clear that Labour’s shift towards fiscal orthodoxy did not have the intended effect. Fiscally conservative voters in the centre were still unlikely to vote for the Labour Party despite that shift. People with a high propensity to vote Labour, however, were especially opposed to the spending cuts, and supporting such cuts undermined the party’s ability to mobilize its core voters. It created discontent among Labour voters and members, which contributed to Jeremy Corbyn’s victory in the party’s leadership election after the Labour Party had lost the 2015 general election (Watts and Bale, 2019; Whiteley et al., 2019).

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Conclusion In conclusion, this chapter has presented evidence that acceptance of fiscal orthodoxy during the Great Recession was bad politics, independent of the economics. The results from the time-series analysis show that social democratic parties systematically lost popularity in opinion polls after implementing austerity when they were in government. When they were in opposition, they mildly benefited when the government implemented austerity, but given that the centre-left often supported austerity even when it was in opposition, this effect is small and not statistically significant. In many countries, other parties led the charge against austerity and thus received a boost in opinion polls (e.g. Syriza in Greece, Podemos in Spain, and UKIP and the SNP in the UK). The results from the BES further show that people who cared about the deficit were less likely to vote for Labour in the 2015 general election. Although the Labour Party adopted a fiscally orthodox policy before the election, it was unable to attract fiscally conservative voters. Instead, people who were not concerned about the government deficit and opposed spending cuts were still much more likely to support Labour. The strategy of signalling fiscal credibility by supporting austerity was thus unlikely to work for social democrats: they were unable to attract fiscally conservative voters but undermined their ability to mobilize their own electoral base. In the UK, this contributed to Labour’s loss in 2015. Although most pundits had expected a hung parliament, David Cameron and the Conservative Party won a majority in the 2015 election. Labour’s dilemma in 2015 is representative of the difficulties that the centre-left experienced in the post-crisis era more generally. Social democrats were unable to find a convincing narrative on austerity that would legitimize it among its supporters, unlike the centre-right, or the post-war Labour government in the UK, which had implemented austerity and simultaneously built the UK welfare state. Unwilling to support ‘old’ Keynesian policies, contemporary social democratic parties were trapped by their economic ideas and failed to oppose the dominant macroeconomic regime, while acknowledging that the political and economic consequences of this regime were wholly unsatisfactory. The finding that social democrats lose support when they adopt austerity is in line with existing research showing that there are long-term costs for the left associated with moving to the centre (in economic terms). In a representative democracy, political competition cannot be limited to valence issues

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because politics is more than the technocratic management of the economy. By accepting austerity, social democratic parties failed to offer a clear alternative and foreclosed any political discussion about the distributive consequences of austerity. This contributed to a convergence of the mainstream political parties and, to use Peter Mair’s words, a ‘hollowing out of democracy’ (Mair, 2013). However, as austerity created economic grievances and political discontent, (new) populist forces grew stronger, while social democratic parties increasingly found themselves sidelined in Europe. Social democratic parties, therefore, not only made austerity mainstream during the crisis, but by doing so also contributed to their own electoral malaise. The final chapter of the book will further discuss this electoral malaise by jointly discussing the causes and consequences of social democratic austerity. Moreover, it will offer some ideas as to how social democratic parties could respond to the new economic and political environment in the wake of the COVID-19 pandemic.

9 Conclusion Introduction In this book, I have set out to explain and explore the consequences of one of the greatest puzzles of the Great Recession: why did social democratic parties, both in and out of power, acquiesce to austerity? Historically, these parties had been fundamentally opposed to austerity policies that would cut government spending and threaten the welfare state. They had built that welfare state and embraced Keynesianism, often using expansionary fiscal policies and state intervention to reduce unemployment. In the decades before the crisis, social democratic parties had already shifted towards the centre, changing their economic policies in response to the dominant economic paradigm (Mudge, 2018). Although social democratic parties never fully accepted the dominance of neoliberalism, there was a paucity of systematic rival economic outlooks. In theory, the financial crisis presented the left with a golden opportunity to challenge the dominant paradigm. By highlighting the great vulnerability of unfettered capitalism, it could have allowed social democrats to renew their economic programme and shift public discourse towards the left. Social democratic parties failed to use this opportunity. Despite a loss of legitimacy of the previous economic paradigm, the centre-left was unable to formulate a coherent alternative. As we saw in Chapter 3, the mainstream left shifted further left on some issues. Among other things, parties of the left again became more sceptical of economic liberalism and questioned the dominance of unregulated (financial) markets. This reversed key elements of the Third Way. However, Chapter 3 also showed that social democratic parties supported the reduction of government deficits and of government debt in the wake of the crisis. They generally bought into the austerity settlement that had dominated Europe’s post-crisis political economy for a decade (Blyth, 2013). As we have seen, this contributed to the ‘strange non-death’ (Crouch, 2011) or ‘resilience’ (Schmidt and Thatcher, 2013) of neoliberalism. My approach to explaining this puzzling outcome has been to study both the popular and the elite politics of austerity. By exploring both the Austerity from the Left. Björn Bremer, Oxford University Press. © Björn Bremer (2023). DOI: 10.1093/oso/9780192872210.003.0009

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demand and the supply side of politics, the book has put forward an explanation demonstrating that social democratic parties were trapped and divided amidst a complex entanglement of strategic considerations and old economic ideas. Even in places where economic or institutional pressures to pursue austerity were weak or absent, these pressures pushed social democratic parties towards fiscal orthodox policies. These policies were supposed to signal social democrats’ integrity, as they attempted to boost their claim to be competent managers of the economy in order to woo centrist voters. But, in hindsight, it was often precisely these policies that furthered the electoral crisis of social democracy in the wake of the Great Recession. This chapter begins by summarizing the argument. Based on Chapter 8, it then discusses why social democratic austerity failed as both a political and economic strategy. Finally, it considers whether and how social democratic parties can escape from their electoral and ideational traps and move beyond austerity in the wake of the COVID-19 pandemic, which presents both opportunities and risks for the centre-left. It argues that social democratic parties need to learn from the previous crisis and avoid repeating the mistakes that they made during the Great Recession: they need to move beyond austerity and develop bold, new economic ideas that redefine their brand—and that of the entire social democratic project—in order to regain their place at the heart of European politics.

The argument in summary The electoral foundations of social democratic austerity The book has explained social democratic austerity in three steps. First, it emphasized that parties operate in a competitive, electoral environment. If they want to implement their agenda, they need to be elected. Parties thus must assemble majorities and construct programmes with a keen eye towards voters. This constrained social democratic parties in the shadow of the Great Recession because they believed that voters felt uneasy about the increasing salience of government debt. Indeed, influenced by the dominant discourse, more than 70 per cent of survey respondents in the European Union (EU) agreed that fiscal consolidation could not be delayed at the beginning of the crisis. Chapter 4 studied this staggering support for fiscal consolidation, systematically investigating the public’s ‘debt aversion’ across a large number of countries. It found that voters responded to changes in the economy in an

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anti-Keynesian fashion, treating public debt like private debt. As a result of voters’ personal experiences of balancing their private budgets, fiscal consolidation resonated more with them than Keynesian deficit spending. They endorsed the popular notion of tightening one’s belt during hard economic times, precluding any discussion of the possibility of implementing largescale fiscal stimulus packages, infrastructure investments, or debt relief—all of which would have undermined the austerity settlement and strengthened the recovery in Europe. The book thus argues that social democrats accepted austerity for strategic reasons. The case studies in Chapters 6 and 7 showed that even in countries that faced little or no economic or institutional pressure to pursue austerity, social democrats were pushed towards fiscal consolidation because they faced a common problem: the need to recover their claim to be competent managers of the economy. This need became especially pressing when the immediate ‘firefighting phase’ in response to the financial crisis was over. When Greece requested a bailout from the EU and the International Monetary Fund (IMF) in 2010, the salience of government debt dramatically increased. Public debt became the most important economic predicament of the time, which gave deficit spending a bad name. In this context, social democrats faced a fundamental dilemma: some of their most important aims, including the protection and expansion of the welfare state and reduction of inequalities, may have been popular but lacked credibility. Social democrats saw themselves confronted with a public discourse stacked in favour of austerity. They bowed to this discourse because they believed that they needed to establish their hawkish credentials to get elected, and this was especially true in countries like Germany and the UK, where the centre-left had been in government before and during the financial crisis. Those parties received most of the blame for the crisis, which shattered their perceived economic competence. To increase the fiscal credibility of their programme, social democrats often went above and beyond to emphasize that they would responsibly manage the economy in a way that did not harm long-term growth. This increased the pressure on them to join the chorus of austerity and accept the organizing political assumption that debt had to be reduced. However, based on evidence from Chapter 5, it is reasonable to assume that social democratic parties actually had more leeway to develop alternative fiscal policies than they realized. The chapter used survey experiments to study fiscal policy preferences more carefully. Concretely, it showed that fiscal consolidation is less popular than social democrats have assumed. In principle, citizens favour lower public debt, but this is not a priority for them; instead,

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they are more concerned about levels of government spending and taxation. Voters on the left are particularly likely to prioritize protecting government spending and they are also likely to be less supportive of austerity, which has largely come at the cost of public spending across Europe. Social democrats, therefore, had more scope to interpret and influence public opinion than has been commonly assumed. In an attempt to change the terms of the debate, they could have highlighted the trade-offs associated with austerity more forcefully. Why did social democratic parties not use the interpretative room that was available to them?

The ideational foundations of social democratic austerity To some extent, electoral demand is always an interpretative question (Mudge, 2018, p. 8). As Lipset and Rokkan (1967, p. 6) wrote, parties ‘help to crystallize and make explicit the conflicting interests, the latent strains and contrasts in the existing social structure’. Parties do not merely represent given preferences; instead, by using narratives and frames to explain what needs to be done or not done, whether now or in the future, they offer choices to voters and influence their preferences (Bawn et al., 2012; Boix, 2000, p. 49; Przeworski and Sprague, 1986, p. 9). Admittedly, mobilizing public opinion against fiscal consolidation would have been a formidable task for social democratic parties to accomplish alone, due to the salience of government debt in the wake of the Greek sovereign debt crisis. At the time, most social democrats did not believe that this was possible; they felt unable to shift the dominant discourse to broaden the spectrum of acceptable fiscal policies. However, internal cognitive constraints also limited their imaginations and bounded their choices. Going beyond the demand side of politics, Chapters 6 and 7 showed that electoral-strategic pressure to support social democratic austerity interacted with ideational pressure. Social democrats essentially interpreted the Great Recession through the lens of the 1970s, and not through that of the 1930s: after the initial shock of the financial crisis was over, they believed that Europe’s economic woes were not primarily due to a lack of aggregate demand. The early crisis response in 2008 and 2009 had been a success because it had not only prevented a total collapse of the financial system but also prevented an even deeper plunge in employment and a turn towards national protectionism. The most common interpretation was, therefore, that the system ‘worked’ (e.g. Drezner, 2014), and most policymakers remained

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wedded to their old economic models and ideas. This was also true of social democratic policymakers, and it undermined their ability to challenge the dominant economic paradigm. In response to the economic upheavals of the 1970s and the 1980s, many actors from the centre-left had bought into a new set of new economic models, which I collectively call ‘supply-side Keynesianism’. Based on New Keynesianism, endogenous growth theory, and the social investment paradigm, they argued that the state needs to actively manage demand in the short run, while in the long run, it should only intervene to improve the supply side. During the crisis, this focus on the supply side helped to legitimize austerity among social democrats. In particular, supply-side Keynesianism contains three tenets that supported austerity: a reduced importance of the output gap compared to Keynes’ original theory; a prioritization of monetary over fiscal policy; and a focus on utilizing the state to generate long-run growth and more equitable outcomes, alongside a belief that the state’s fiscal capacity must be protected to ensure this. To a certain extent, these ideas overlap with other economic theories such as neo- and ordoliberalism and they were drawn upon and utilized in different ways by social democrats in different countries, depending upon their specific national and economic contexts and policy legacies. However, as Chapters 6 and 7 illustrated, they provided a distinct ideational foundation that has shaped the ways in which social democratic actors engaged with austerity post-crisis. In both countries, politicians had embraced supply-side reforms in the pre-crisis era and adopted a technocratic and managerial view of politics, which constrained their ability to develop new economic ideas and models when the crisis struck. Therefore, this book confirms that the problem for social democratic parties during the economic downturn was also ‘one of ideas and politics, rather than ineluctable economic necessities’ (Keating and McCrone, 2013, p. 10).

Social democracy trapped and divided Social democratic austerity was thus chosen on the basis of electoral as well as ideational beliefs (Hall, 1989, 2020). This decision relied on a multidimensional misalignment between these two dimensions rather than a single causal factor. On its own neither strategic interests nor ideas are deterministic. Electoral demand is often an interpretative question, and there are usually several economic ideas that can gain currency at any time. In the

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shadow of the Great Recession, however, the combination of strategic considerations and economic ideas was powerful and pushed social democrats towards austerity. Responding to the exceptional salience of government debt, they believed that fiscal credibility was a necessary condition for winning elections. Ideational factors then prompted and legitimated austerity, too. Unwilling to support old Keynesian policies and unable to develop new economic policies, contemporary social democratic parties were trapped by their economic ideas. They did not have the means available to craft a story that opposed the dominant macroeconomic regime (Blyth and Matthijs, 2017). Over time, some social democratic parties were able to move beyond austerity, but most could not escape these factors during the crisis because they were trapped and divided: the legacies of previous policies as well as factional divisions undermined their ability to push for an anti-austerity platform. They were electorally trapped because the Third Way had alienated some of their traditional electorate (Evans and Tilley, 2017); they were ideationally trapped because the implementation of supply-side Keynesianism had crowded out ideas and actors who were committed to a demand-side view of the economy (Mudge, 2018); and it left them deeply divided into different factions. Although many social democratic parties tried to move beyond the Third Way, their parties’ recent pasts still influenced their crisis response due to strong feedback effects. In response to the Great Recession, social democratic parties thus looked back, as they were afraid to look ahead. They failed to develop bold, alternative fiscal programmes, as strategic considerations were used to quell internal opposition to austerity. Despite the costs associated with austerity and the depth of the economic crisis, institutional structures created powerful mechanisms for path dependency and ideational stickiness. They believed that it was better to increase their fiscal credibility by accepting austerity than to propose old-fashioned Keynesianism, which they did not think they could sell to voters. Social democratic parties thus defended the existing paradigm for many years, rather than leading the charge against it. This illustrates the difficulty for office-seeking politicians in pushing for paradigm change. Elected politicians need to respond to the dominant political agenda, which is often influenced by the existing economic paradigm. Old economic ideas are deeply entrenched in the public discourse and even during economic crises, the political reality is rarely clear enough for voters to recognize the anomalies within a given paradigm on their own. They rely on powerful narratives that move the economic discourse and shift the so-called Overton window, the perceived understanding of what is both

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possible and desirable (Lynch, 2020). This is a formidable challenge for office-seeking politicians, for whom the primary concern is their short-run electoral prospects; this gives them an incentive to look backwards and not ahead. Still, social democratic austerity was not inevitable. Other roads were possible, as the struggles within the centre-left in Germany and the UK revealed. The road that social democratic parties ended up taking emerged from a series of choices based on strategic and cognitive pressures. Over time, that path narrowed and, when the salience of government debt increased to unprecedented levels, many party leaders ceased to see real alternatives to austerity. Partly, this was also a problem of leadership: the centre-left lacked strong leaders who were willing and/or able to overcome the legacy of the Third Way. Mobilizing public opinion against austerity would have been difficult for any leader given the dominant economic discourse, but leading social democrats in the 2010s were especially ill-equipped to do so. For example, in the UK, neither Gordon Brown nor Ed Miliband was strong enough to assert their authority on the party. The Third Way and the divisions between its main architects, Tony Blair and Gordon Brown, had divided the party into different warring camps. Both Gordon Brown and Ed Miliband were attacked from all sides and were unable to formulate a coherent anti-austerity agenda. As an unelected Prime Minister, Gordon Brown was extremely concerned about winning the election in 2010, and although his economic instincts were right, he gave in to strategic-electoral considerations when he accepted the ‘Darling plan’. Similarly, Ed Miliband, who succeeded Gordon Brown as the leader of the Labour Party, was unable to ignore these considerations. He was concerned with holding the party together, and when the Labour Party gained a lead in the polls midway through the parliamentary term, the chance of a return to government in 2015 made him very cautious in programmatic terms. Similarly, in Germany, the SPD was left without clear leadership after the end of the Schröder era in 2005. Several party leaders failed to establish their authority in the party between 2005 and 2009, and when Sigmar Gabriel became the leader in 2009, a position he held for more than seven years, he was unable and unwilling to push for new economic models. He was a strategic pragmatist, who did not have a clear economic vision. Despite promising a renewal of the party’s programme in 2009, Gabriel was less interested in academic debates about the role of the state vis-à-vis the markets and more interested in policy initiatives that would bring about short-term electoral gains. Although he brought the party together and repaired its relationship

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with the trade unions, he also undermined its ability to position itself clearly and develop new ideas for the future. Yet, in both countries, it is wrong to place the blame on the party leaders alone. For a long time, there were no actors in sight in either Germany or the UK who were able to lead a broad alliance against austerity. Jeremy Corbyn emerged as a politician willing to attempt this formidable task. Although the change in rhetoric towards an anti-austerity platform revived the Labour Party, even Corbyn and his Shadow Chancellor John McDonnell did not put forward fiscal policies that were very different from those of Miliband and Ed Balls. They, too, were committed to a ‘fiscal credibility rule’ and, ahead of the 2017 election, they pledged not to reverse many of the spending cuts that the Conservatives had implemented. As the Great Recession was widely seen as a fiscal crisis of the state, it remained a challenge to move beyond the austerity settlement, even for the most radical social democratic actors. Overall, the Great Recession brutally exposed social democratic parties. In some debtor countries, social democrats often had little choice but to implement fiscal consolidation, as the fiscal crisis of the state was entangled with the eurozone crisis.1 But even in countries that did not require a bailout and were subject to pressure social democrats helped to impose austerity abroad and supported fiscal consolidation at home. Without a coherent new set of ideas on how to respond to the crisis, the centre-left was bound to take a defeatist position from 2010 onwards when government debt became the overriding economic concern. It accepted fiscal consolidation as a necessary policy that it did not believe in but saw no real prospect of changing. It increasingly became a bearer of bad news, struggling to defend the welfare state against the onslaught of fiscal consolidation and putting forward a contradictory programme—accepting austerity but championing the welfare state—because it did not know any better.

Social democratic austerity and its political consequences Given that social democrats accepted austerity for electoral and ideational reasons, it is important to ask whether austerity lived up to its promise. 1 In these countries, the strategic choices that social democratic parties faced were somewhat different, as they were forced into ‘involuntary’ austerity by external creditors. However, even in southern European countries, social democrats’ acquiescence to austerity sometimes had a ‘voluntary’ element, as they implemented them even when memorandums of understanding did not make them necessary (e.g. Zapatero in Spain or Renzi in Italy).

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Chapter 8 already explored the electoral consequences of austerity and evaluated social democratic austerity as a political strategy. Based on a time-series analysis from twelve countries, the chapter showed that social democratic parties which implemented austerity lost support. This effect was immediate, and it persisted over time. Individual-level panel data from the UK further showed that even when social democratic parties only adopt fiscal orthodox policies in election campaigns, they lose. They alienate core voters who are opposed to austerity, while they have a hard time winning over centrist voters who are fiscally conservative. Austerity thus contributed to the centre-left’s crisis in Europe. In the decade after the financial crash, social democratic parties were decimated in countries like France, Greece, Ireland, and the Netherlands and lost elections in many other countries such as Germany, Italy, and Austria. Even in Scandinavia, formerly a stronghold of social democracy, the centre-left lost support and polled below 30 per cent in elections in Sweden and Denmark. Despite recent electoral victories in some countries, the average vote share of social democratic parties remains far away from the pre-crisis levels. Of course, this crisis of social democracy is multifaceted and cannot be explained by a single factor. In fact, the increasing salience of cultural, as opposed to socio-economic, issues and the variety of long-term structural dilemmas that social democrats face (discussed in Chapter 2) play central roles in that crisis. Still, there is clear evidence that the acceptance of fiscal orthodoxy was bad politics, independent of the economics. In the post-crisis era, social democratic parties did not find a narrative on austerity that they could present in a convincing and authentic manner. They were unable to legitimize their espousal of it among the electorate, unlike the centre-right or, indeed, the post-war Labour government in the UK, which implemented austerity while simultaneously building the British welfare state. Unwilling to support old Keynesian policies following the Greek sovereign debt crisis, contemporary social democratic parties did not have a good answer to the Great Recession. They failed to oppose the dominant macroeconomic regime while acknowledging that the political and economic consequences of that regime were wholly unsatisfactory. Social democrats still tried to portray themselves as the protectors of the welfare state in election campaigns (see Chapter 3), but they could not show what this meant in practice. By accepting austerity, they shifted the burden of adjustment to the weakest members of society, which undermined their own programme: with no clear idea of how the state should protect citizens from the market, social democrats failed to be a strong force during the crisis and did not live up to their historic promise to make capitalism socially

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acceptable. This left many people in a vulnerable position and contributed to the feeling that social democracy had become an empty and obsolete term (Berman and Snegovaya, 2019). This brand dilution (Lupu, 2016), in turn, has contributed to a decline in support for social democratic parties in recent years. As Hay (1999, p. 150) had written earlier with respect to the Labour Party’s Third Way, ‘the costs of …[the] chosen strategy for securing electability may well be [the party’s] social democratic credentials’. Moreover, by accepting austerity, social democratic parties effectively turned fiscal consolidation into a valence issue. As argued in this book, they attempted to neutralize the topic by shifting towards the centre and imitating their opponents’ position. In this sense, social democratic austerity was a strategic policy. In hindsight, however, this strategy backfired. It was based on a fundamentally flawed understanding of representative democracy or, to use Peter Mair’s terms, an excessive amount of ‘responsiveness’ (Mair, 2013). In a representative democracy, political competition cannot be limited to valence issues because politics is more than the technocratic management of the economy. By accepting austerity, social democratic parties failed to offer a clear alternative to it and foreclosed any political discussion about its distributive consequences. This contributed to a convergence of mainstream political parties and a ‘hollowing out of democracy’ (Mair, 2013) This was a strategic mistake in the short and long run. In the short run, social democrats tried to reduce the salience of fiscal consolidation as an issue. However, this strategy was not very effective because the economic crisis became widely interpreted as a sovereign debt crisis. Rightly or not, social democrats were perceived as less competent when it comes to managing the public’s finances amidst this turmoil, and hence, social democratic austerity gave the centre-right a strategic advantage: the conservatives were not only able to claim that they supported the correct economic policies, but also to insist that they were the best qualified to implement them. In this sense, social democrats joined a game that they could hardly win: no matter how frugal they promised to be, the centre-right always put the bar a little bit higher. Social democrats only helped to mainstream austerity, entrenching the notion that it was a necessary evil without reaping any electoral gains. Over time, this worsened the social democratic dilemma. In their search for economic credibility, social democrats not only watered down their programme but also legitimized arguments that fiscal consolidation was important. The nature of the path that the parties chose as a way of responding to their dilemma thus became self-reinforcing: by bowing to the general economic discourse that austerity was necessary, social democrats undermined their ability to break free from this course. They became dependent on

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forces outside their own control, which further worsened the brand dilution of social democracy that Chapter 8 highlighted. In the long run, austerity, therefore, also undermined the position of social democratic parties by creating space for populist political forces (such as Syriza, Podemos, Jean-Luc Mélenchon, and Jeremy Corbyn within the British Labour Party) to rally anti-austerity sentiments (Hopkin, 2020). Given that government debt is not a priority for voters, as Chapter 5 as showed, it is not surprising that voters punish parties that implement austerity (Bojar et al., 2022; Hübscher et al., 2021; Jacques and Haffert, 2021). The policy created a great deal of political discontentment, especially when centre-left parties implemented it in a ‘bait-and-switch’ manner, as some had previously done in Latin America (Lupu, 2016; Roberts, 2014). Once austerity developed its full force and voters felt the harsh consequences that it entailed, they became disappointed with the failure of the centre-left to offer a perspective beyond it. As a result, new populist forces in Europe were able to capitalize on the crisis, while the different constituencies of social democratic parties fractured into different sections and groups, each pursuing their own narrow interests. Even though social democratic parties accepted austerity for strategic reasons, it hurt them in the end and contributed to their current electoral malaise.

Social democratic austerity and its economic consequences As this book has demonstrated, social democracy austerity was important because it entrenched austerity as the dominant fiscal policy in the shadow of the Great Recession. By accepting austerity as the dogma of the day, social democrats helped to mainstream the policy, which is crucial to explaining its dominance in the 2010s. There is growing evidence that this not only had dramatic political consequences but also contributed to Europe’s economic woes in that decade. To begin with, high levels of government debt did not actually cause the crisis. Quite the reverse: the crisis caused an increase in government debt. The sharp fall in many countries’ GDP in 2008 and 2009 reduced the revenues that governments could collect through taxation and simultaneously increased their expenditures as the automatic stabilizers kicked in. At the same time, massive bank bailouts further increased government deficits across Europe. The broad turn towards fiscal orthodoxy in Europe thus confused cause with effect (Tooze, 2018): high government deficits were the result of a global fall

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in demand, and austerity made little sense as a policy in the post-crisis context (Blyth, 2013; Matthijs and Blyth, 2018). As a result, there is increasing evidence that austerity worsened the economic situation (e.g. Blanchard and Leigh, 2013; Heimberger, 2017) and contributed to a ‘lost decade’ in Europe. This is true because the recovery in post-crisis Europe and other advanced economies (but especially in Europe) was very slow. In this context, Lawrence Summers (2014, 2018) rehabilitated Alvin Hansen’s concept of ‘secular stagnation’. Hansen had developed the term with reference to the US economy in the 1930s, arguing that the essence of secular stagnation was ‘sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment’ (Hansen, 1939, p. 4). Summers used this concept to talk about the economic recovery, or the lack thereof, after 2008. Subsequently, scholars debated the question of secular stagnation (see e.g. Eggertsson and Mehrotra, 2014; Eichengreen, 2015a; Gordon, 2015; Teulings and Baldwin, 2014), but most agreed that the post-crisis environment was characterized by a lack of aggregate economic demand. In this sense, the Great Recession was very different from the crisis of the 1970s and 1980s, something which many policymakers failed to realize. Even in countries where growth and employment rebounded relatively quickly after the crisis, wage and productivity growth remained anaemic for quite some time. As Hansen (1939, p. 4) had already argued, an economy needs strong and healthy levels of investment to maintain full employment. Yet, in post-crisis Europe, austerity undermined the conditions for such investment. By cutting government spending and/or raising taxes, governments reduced aggregate demand and thereby prevented, or at least significantly hampered, a quick and comprehensive recovery in Europe. The argument that governments can spend the money that they save on interest payments to pay for additional teachers and nurses sounds intuitive, but it assumes that governments find places to cut spending and reduce debt in the first place. The evidence actually shows that governments usually first cut spending on investment (Breunig and Busemeyer, 2012; Haffert and Mehrtens, 2015; Jacques, 2021), which is bad for the long-term health of the economy and also reduces the resources that governments have available to spend on nurses and teachers. Consequently, the austerity settlement in general, and social democratic austerity in particular, has had significant economic costs in the short and long term. Cutting government spending not only worsened the slump by reducing aggregate demand further but by reducing growth, also worsened governments’ debt burden (since debt is usually measured relative to GDP). Austerity was bound to be a failure from a Keynesian perspective because it

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ignored the fallacy of composition. Given that the income of one economic agent is the expenditure of another agent, not everyone can deleverage at the same time without adverse economic consequences (Blyth, 2013). Austerity, therefore, contributed to a deflationary bias in Europe and undermined the conditions for long-term productivity-increasing investments. Moreover, as governments opted for fiscal consolidation, the pressure to manage demand fell on central banks. Many of them implemented ultraloose monetary policies, adopting unconventional measures: they reduced interest rates, often into negative territory, and vastly expanded their balanced sheets through quantitative easing (QE). In the eurozone, the president of the European Central Bank (ECB) Mario Draghi also promised to do ‘whatever it takes’ to protect the eurozone. This provided a lifeline for politicians who were championing austerity, as it prevented demand from falling even further. It softened the economic damage of austerity in the post-crisis period, reducing the trade-offs associated with austerity. However, going beyond macroeconomic considerations, the post-crisis macroeconomic regime—combining austerity with unconventional monetary policies—had major distributive consequences antithetical to the left. Although the way that austerity was administered differed across countries, it generally contributed to increasing economic inequalities, one of the major economic predicaments of our time (Piketty, 2014, 2020). In Europe, austerity was primarily implemented by reducing government spending, which also undermined the welfare state. Cuts in benefits, pensions, and other forms of government spending largely hit the poor, while the rich were spared the costs of austerity. In some countries, social democratic parties increased taxes on the rich (e.g. in France), but in general, they did not bear the brunt of the measures. In fact, many people at the top end of the wealth distribution benefited from strong asset price inflation which was fuelled by ultra-loose monetary policies. Furthermore, austerity was particularly harmful to the development of regional disparities in economic growth and wealth. In many advanced economies, individual regions have been left behind, leading to pockets of economic stagnation. While some areas recovered quickly from the Great Recession, including those with strong financial centres that had been at the heart of the original crash, others have suffered from a regional decline that was made worse by the recession. This has contributed to increasing resentment against political and economic elites and even undermined the stability of European democracies.

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These problems of aggregate and regional stagnation and inequality require active demand management and more public investment in physical infrastructure and human skills than supply-side policies can deliver. Austerity thus contributed to the principal economic problems in Europe that predated the COVID-19 pandemic. As they mainstreamed austere policies, social democratic parties need to take some of the blame for those problems. Even ignoring the costs of austerity in terms of economic growth and inequality in post-crisis Europe, in most countries it did not even lower the debt burden, and therefore, also failed on its own terms.2 Moreover, despite very low interest rates, which reduced governments’ borrowing costs, it did not free up enough resources for the governments to invest in long-term growth and left most European countries vulnerable to the next crisis. Social democratic austerity was, therefore, a colossal failure in both political and economic terms. It contributed to the main economic problems of the 2010s and threw Europe’s centre-left into its deepest electoral crisis since the Second World War. Sidelined by the centre-right and deeply unsettled by the rise of populism, social democrats had lost both their political and economic compasses. As a result, Europe’s social democratic parties were losing, while the people were suffering.

Looking ahead: social democracy after the COVID-19 pandemic My argument emphasizes that parties are strategic actors and are agents of their own fates. The economic policies that parties adopt matter for the governance of advanced economies and have important feedback effects. However, parties operate in a strategic environment and face a range of constraints— electoral, discursive, and ideational—that emerge from the institutional ecologies that they inhabit. More than a decade after the beginning of the Great Recession, this strategic environment changed dramatically with the COVID-19 pandemic. This was a dramatic shock to the global economy, made worse by the war in Ukraine that began in 2022. How did these crises affect the prospect of a renewal of social democratic parties and their economic programme? The pandemic presented both opportunities and risks for social democratic parties. Looking back, the 2010s resemble the interregnum of the 1970s: 2 The main exception here is Germany, which has recently seen a significant fall in government debt. This was only possible because Germany externalized the problem of demand by running an export-led growth model, as discussed in Chapter 7.

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poor economic performance created political turmoil, but a new economic paradigm had yet to emerge. The COVID-19 pandemic brought a painful end to this interregnum, leading to an unprecedented health and economic emergency across the globe. In Europe, it highlighted both the damage that austerity had done and the central importance of the state. Harmed by a decade of cuts, the public sector was overwhelmed by the spread of the virus, and successive waves of the pandemic brought health care systems close to collapse; local and central governments were understaffed and often unable to track and trace the virus; and remote learning at schools and universities was hampered by a lack of digitalization. At the same time, governments became the spender of last resort: they bailed out companies, implemented massive furlough schemes to preserve people’s jobs, and provided them with direct benefits to safeguard their livelihoods. The pandemic elevated levels of insecurity and uncertainty, which forced the state to do all kinds of things that had been unthinkable in the previous decade. It thus contributed to a rediscovery of the state as an incarnation of the collective interest. For social democratic parties, this provided a favourable shift in the economic discourse. Following Berman (2006), the raison d’être of social democracy is to find a compromise between capitalism and democracy, between the state and the markets. Europe’s social democratic parties were good at living up to this task in the post-war period: they created and expanded the welfare state, using it to counterbalance unfettered market capitalism. They were ready to intervene in markets to distribute the growth that capitalism generated, which offered a transformative perspective: it tamed the whims of markets and instilled a sense of collective purpose in capitalism. Over time, however, social democrats lost their transformative perspective. As this book has highlighted, this loss goes back several decades. During the economic turmoil of the 1970s, the social democratic promise was put into question and many social democrats lost faith in their own political project. Even Perry Anderson (2000, p. 12) wrote in the New Left Review that ‘the only starting point for a realistic left today is a lucid registration of historical defeat. Capital has comprehensively beaten back all threats to its rule.’ The pessimism expressed in this essay was at the heart of the Third Way. Third Way social democrats did not challenge the underlying faith in free markets, but only moderated it. Their rhetoric further consolidated the support for markets, thereby changing public opinion and the dominant discourse about how the economy should be governed in a way that worked to their disadvantage. Third Way social democrats certainly still came up with effective policies to improve the livelihoods of many working people, but they

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failed to articulate a broader vision about the relationship between the market and the state. They turned away from discussions about the nature of capitalism and adopted a more technocratic or managerial outlook, accepting that the left had nothing to offer that fundamentally differentiated it from the right. In other words, the problem of the Third Way was not its policies but the language in which these policies were couched (Judt, 2009). Based on an acceptance of free markets and support for supply-side economics, social democrats could not question the dominant economic paradigm. This contributed to a perpetual centrism: concerned with building a broad coalition from the left towards the centre, they failed to draw lines and to identify their natural opponents. They not only lost the argument but also failed to articulate a vision of what social democracy is for. This came back to haunt social democrats during the Great Recession: they still supported policies that were different from those of the right, but they lacked ideas on the basis of which to build a new political economy. Although many people initially saw the financial crisis as an opportunity for an intellectual renewal of the left, this did not materialize. Social democrats resigned themselves to speaking a language that had been developed by the right, not by the left—a language that pushed them towards austerity. The pandemic presented the left with another opportunity to change the dominant discourse. It relegitimized government interventions, as the full force of the reality imposed by the pandemic made it impossible to rely on market mechanisms alone. This may, in future, help the left to develop a new transformative agenda that questions the dominance of markets once again and moves beyond austerity in a post-pandemic world. However, there are also clear risks looming in the wake of the COVID crisis. In the face of the pandemic, Europe’s governments quickly abandoned their fiscal rules. Justified by the exogenous shock, the reincarnation of the state as the spender of last resort led to the highest level of government borrowing outside of wartime across most of Europe. As a result, government debt increased massively, which could eventually lead to pressure to return to austerity. In economic terms, the sizeable increases in government debt are not a problem as long as interest rates remain low (Blanchard, 2019). If Europe returns to economic growth and this rate of growth is higher than the interest that governments have to pay, states will simply be able to grow out of their debt. Politically, however, the right may push for fiscal consolidation for ideational and strategic reasons. It may well realize that it benefited from the economic discourse during the Great Recession and try to increase the salience of government debt once again. In fact, in some countries, concerns

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about government deficits and debt became a hot political topic again soon after the initial shock of the pandemic had subsided. But even if we do not see a return to austerity, fiscal policies and their trade-offs will remain highly politicized. The vast amount of new debt that states took on to respond to the pandemic has been overshadowed by other economic problems that emerged in its wake. Following massive disruptions to supply chains, inflation returned with a vengeance in 2021 and 2022. Prices increased at a speed not seen since the 1970s, which intensified the conflict over macroeconomic policies in many advanced economies. Compounded by the war in Ukraine, which massively increased the costs of energy in Europe, central banks hiked interest rates again and shifted from QE to quantitative tightening faster than they had anticipated. As they were again confronted with the trade-off between fighting inflation and supporting demand, monetary policy became even more politicized than it had been after the Great Recession. This all played out in a context where the costs of climate change were becoming more visible by the day. As we face the threat of environmental collapse, it has become imperative for policymakers to fundamentally transform our economies. The adjustments required to ‘green’ all walks of life and to become climate neutral are massive. They are so large that they entail nothing short of a new ‘great transformation’ (Polanyi, 2001), which would offer many (economic) opportunities but would also entail massive (economic) disruptions that are difficult to predict. Yet, it is clear that these adjustments require a level of public and private investment significantly higher than what we have seen in the past decades. In this context, fiscal policies still involve complex trade-offs that pit different goals against each other. Although most leaders recognize that government spending is required, inflation, increasing interest rates, and the sheer size of the debt that governments have accumulated have given centrist and centre-right policymakers an excuse to push for consolidation yet again. Put differently, the return of old trade-offs and the emergence of new ones means that the fight over budgetary priorities will resume in many advanced economies. This is especially likely in Europe, where fiscal policies are entangled with the economic governance of the eurozone. Although the EU’s pandemic recovery fund Next Generation EU changed Europe’s response to the crisis in the short run—embracing a collective expansionary effort—discussions about the EU’s fiscal rules may rekindle divisions between its member states. A strong social democratic voice is sorely needed in these debates about what is to be done—one which will help us to navigate and manage the

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disruptions evolving from the contemporary poly-crises. To play this part, social democrats need to avoid the mistakes of the Great Recession. They have to confront the contradictions that hampered their programme in the 2010s head-on and resolve to redefine their brand. To do the latter, however, it will not be sufficient to return to ideas from the twentieth century. In the heyday of social democracy after the Second World War, economic growth led to increasing state revenues that social democratic parties could distribute. Combined with growing wages, this led to a rise in living standards for workers and allowed the left to expand services that were central to their political promise: a broad welfare state, mass education, and public healthcare. Yet, the positive link between economic growth, welfare state expansion, and electorally strong social democratic parties has long been a thing of the past. Many European countries experienced low growth rates before the pandemic and it is unlikely that high, sustainable growth will magically reappear. Instead, social democrats need to come up with new ideas that allow them to address the contemporary economic disruptions while still winning elections at the same time. Unfortunately, in many countries, this will be a formidable task. Hurt by the political consequences of the Great Recession, social democratic parties are not the political force that they used to be anymore, neither electorally nor intellectually. The political realignment that has occurred on the left in the past few years will make it difficult for it to shape the new economic paradigm alone. As Green and far-left parties are surging, social democrats will need to build alliances with those parties to ensure they can form progressive majorities. In a fight for their survival, they will need to manage the difficult trade-off between working with other parties to maximize their policy influence and undermining their own relevancy. To achieve this, it is clear that social democrats need to move beyond austerity and rethink the relationship between markets and the state in the twenty-first century. They need to set out a coherent and innovative programme that challenges the basic parameters of how the economy is governed. Due to the economic chaos caused by the pandemic and the war in Ukraine, it is clear that it is no longer sufficient to rely on monetary and supply-side policies to govern the economy. To reinvigorate Europe’s economies and enable the green transition, it will, instead, be vitally important to expand the capacity of the state, intervene in the economy, and actively use fiscal policies to finance massive investment programmes in human and physical capital. These macroeconomic policies need to be combined with social programmes that support the weakest members of our societies. The economic

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ruptures of our time, such as the return of inflation and the transition to a green economy, have come with significant distributive effects. To prevent social upheaval, policymakers need to help those who are hurt most by them. In the face of widespread automation, social democratic parties may even have to think about decoupling such support from the notion of work, as they did during the pandemic, to protect individual citizens from the disruptive effects of large-scale transformations. This would help address rising inequalities and to create a new form of ‘embedded liberalism’ (Ruggie, 1982), allowing the welfare state to empower individuals and shelter them from disruptive global economic processes. All of these policies are incompatible with austerity, which social democrats need to oppose in a post-pandemic world. They will need to develop a programme that frees up resources to invest in human and physical capital while protecting the welfare state. To be sure, social democrats cannot only rely on deficit spending; other sources of revenue will also be important to pay for their programme, including higher taxes on the rich and on corporations. None of this will be possible, however, if austerity becomes the overriding economic policy again after the pandemic, undermining the ability of the state to improve people’s livelihoods. Implementing such a programme will not be easy. From an economic perspective, many of these policies will inevitably create some inefficiencies and there will be leakages and externalities in today’s globalized economy. However, the greater challenge for social democrats will be to implement such policies politically. As emphasized in Chapter 2, in the short run, politicians often must work with the given electoral demand. As the salience of cultural issues has increased, dividing the left’s constituency (Abou-Chadi and Wagner, 2019; Gingrich and Häusermann, 2015; Kitschelt, 1994), social democratic parties will inevitably struggle to put together a broad political coalition. But there is hope. Many of the policies needed to address the biggest (economic) disruptions of our time have a distinctly social democratic flavour and are individually popular with many voters. The challenge for social democrats is to combine these into a single economic programme that allows them to (re)gain power. Given that issue salience and public opinion are subject to dynamic change, which is endogenously influenced by policymakers and politicians, this is not impossible. Back in the 1990s, Pierson argued that politicians could use their room for manoeuvre to overcome voters’ strong support for the welfare state, creating scope for retrenchment. He suggested that ‘if retrenchment advocates can restructure the ways in which trade-offs between taxes, spending, and

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deficits are presented, evaluated, and decided, they may be able to shift the balance of political power’ (Pierson, 1996, p. 177). In the wake of the pandemic, social democratic parties must shift the balance again but this time in the opposite direction, increasing the salience of socioeconomic issues and mobilizing around a fresh programme couched in a new economic language. For all these reasons, social democratic parties need to move beyond austerity. To use the words of Peter Gourevitch (1986, p. 240), ‘the future always required imagination: politicians require imagination to find new ways of linking policy goals to coalitions’. After the COVID-19 pandemic, social democratic parties will again need some imagination to save themselves and, in the process, live up to their historic promise to find a compromise between capitalism and democracy in the twenty-first century.

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Index Agenda 2010 16, 56, 170–1, 175–81, 191, 198, 205–6, 212 Alexander, Douglas 154 Attlee, Clement 130, 155 austerity anti-austerity movements 57, 80, 164 anti-austerity parties 38, 57, 80, 157, 167 austerity settlement 2–6, 8–9, 13–16, 33–40, 80, 201, 229–39 elite politics of austerity 24–5, 228 narratives on austerity 46, 58, 140–51, 171, 180, 189–92, 205–7, 231–6 popular politics of austerity 23 social democratic austerity 6–16, 18t, 21–7, 34–59, 210–41 Austria 6f, 19, 33, 67, 69–75, 88n, 92, 215, 236 bailout packages 20, 65, 180–8, 196 balanced budgets 35, 66, 83, 195–9 balance of payments constraint 132 Balls, Ed 129–35, 145–68, 235 bank bailouts 45, 69, 141, see also bailout packages Bank of England 134, 153, 161–2 Barber boom 131 BES. See British Election Study Beveridge Report 130 Binding, Lothar 186, 188, 200 Blair, Tony 31, 133–4, 164, 174, 234 Brandt, Willy 173 Bretton Woods System 7, 29, 35, 130 British Election Study (BES) 18t, 25, 211, 219–26 Brown, Gordon 32, 129, 133–5, 140–9, 157–66, 234 budgetary debates 11 budgetary priorities 17, 110, 244 budgetary rigour 18, 61, 65t, 67–79, 136–40, 178–80 Callaghan, James 48n, 131–2 Cameron, David 20, 29, 226

Carter, Jimmy 173 Clinton, Bill 52 conjoint experiment 103, 110–14, 120–6 Corbynism 129, see also Corbyn, Jeremy Corbyn, Jeremy 137–40, 164–7, 219, 235–8 COVID-19 pandemic 15n, 17, 25, 167, 241–7 critical junctures 10, 26, 63–4, 79 Cruddas, Jon 154, 158–9, 165 current account imbalances 197 Darling, Alistair 20, 128–9, 141–50, 160, 234 Darling Plan 20, 143–50, see also Darling, Alistair debt aversion fiscal conservatives 46, 83, 88–100, 114–17, 171, 211 fiscal hawks 83, 88–100 private household analogy. See household analogy debt brake 3, 20, 65, 170, 184–7, 192 deflation 1–4, 28–33, 48n, 52, 240 demand management 3, 13, 27, 29n, 30, 43–53, 135, 163, 173–4, 181–91, 201–6 Denham, Jon 141, 152, 158, 162 Draghi, Mario 8, 36, 240 ECB. See European Central Bank economic credibility 12–17, 27, 46–7, 100, 129–35, 147–59, 165–7, 199, 210, 222–37 credibility gap 12, 47, 129, 154, 166 economic productivity 20, 184 Eichel, Hans 174–6, 202 electoral punishment 82, 107 electoral realignment 55, 212 electoral strategy 12, 17, 207–8 electoral pressures 10–12, 127 median voter 15, 43, 61, 136, 212 electoral trap 15, 55, 205 electoral turn 22, 42

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electorate centrist voters 17, 46, 57–9, 154–63, 208, 213–14, 229–36 core voters 17, 25, 55, 211–14, 225, 236 median voter. See electoral strategy potential voters 25, 58, 211–14 embedded liberalism 246 emergency Keynesianism 1, 7, 32–4, 36n, 53 endogenous growth theory 13, 232 Eurobarometer 18t, 19–23, 81, 88–90, 98–100, 102–3, 151f, 192–3 Eurobonds 67n, 189–90, 199–201 European Central Bank (ECB) 8, 36–7, 90, 202, 240 Draghi, Mario. See Draghi, Mario European Exchange Rate Mechanisms (ERMs) 133, 158 European Financial Stability Facility (EFSF) 187 European Union (EU) 2, 7–8, 23, 32–7, 65, 88, 187–90, 215–19, 229–30, 244 eurozone crisis 16, 20, 38–41, 56–61, 80–1, 118, 150, 172–6, 187–207, 235 creditor countries 3, 8, 33–8, 65, 92 debtor countries 2–8, 16–20, 33–8, 56, 65, 76, 92, 171, 188–91, 203–7, 235 Great Recession. See Great Recession expansionary fiscal contraction thesis 82 external devaluation 87 feedback effects 124, 129, 233, 241 financial crises crisis of debt 11, 16, 27, 144, 166 crisis of growth 11, 27, 144, 166 eurozone crisis. See eurozone crisis Great Depression. See Great Depression Great Recession. See Great Recession sovereign debt crisis 2, 12, 17, 33, 45, 61–5, 88–100, 109, 126, 148, 192–9, 205–6, 231–7 fiscal competence 47, 171, 207 fiscal conservatism 46, 100, 128, see also debt aversion fiscal consolidation revenue-based consolidation 5, 103, 110, 117–21, 126 spending-based consolidation 110, 123–6 fiscal credibility. See economic credibility fiscal ignorance 107, 166

fiscal orthodoxy 20, 35–8, 102, 129, 159, 171–5, 207, 225–6, 236–8 fiscal policy asset protection 8, 34–6, 84, 94, 142 counter-cyclical fiscal policy 162 fiscal stimulus 142 quantitative easing (QE). See quantitative easing fiscal prudence 141, 156, 164–6 fiscal sustainability 164, 185, see also progressive consolidation thesis fixed-effects regression model 222–5 Foot, Michael 132, 149 framing 45, 83 France 2–8, 16–19, 30, 38, 57, 67–76, 88n, 142, 176, 190, 236–40 Hollande, François 3, 190 Mélenchon, Jean-Luc. See Mélenchon, Jean-Luc Gabriel, Sigmar 187–90, 195–204, 234 Germany Christian Democrats (CDU) 171–9, 187, 191–8, 207–8 Christian Social Union (CSU) 171–9, 187, 191–8, 207–8 corporatism 175 current account surpluses 197 Die Linke 55, 170, 178, 198, 205–7, 212 Free Democratic Party (FDP) 174–6, 187, 192, 198 German Trade Union Confederation (DGB) 172 Hartz Commission 175 Konjunkturpaket I 182 Konjunkturpaket II 182 Merkel, Angela. See Merkel, Angela Sch¨auble, Wolfgang. See Sch¨auble, Wolfgang Schr¨oder, Gerhard. See Schr¨oder, Gerhard Schuldenbremse. See debt brake Schwarze Null. See Schwarze Null sick man of the euro 174 Stabilit¨ats- und Wachstumsgesetz 173 globalization 7, 30–6, 43–4, 51, 60–3 golden rule of borrowing 133 Government debt. See government deficit government deficit 1, 16, 22, 45, 61, 81–5, 90, 96–9, 157, 171–5, 184n, 226–9, 238, 244

Index

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Great Depression 1, 5, 16, 28–36, 41–5, 56, 145, 165, 176 Great Recession Lehman Brothers. See Lehman Brothers mortgage crisis 63 Greece 1–11, 16–19, 33–6, 57, 65–78, 88–92, 188, 196–7, 215–9, 226–36 Greek bailout 12, 148, 180, 187, 192 Syriza 16, 57, 78–81, 226, 238

New Keynesianism. See New Keynesianism stimulus programmes 1n, 142, 174, 181–6, 201–6 supply-side Keynesianism. See supply-side Keynesianism Keynes, John Maynard 28–9, 50, 86, 129–30, 134–5, 142, 166, 183, 201, 232 Kinnock, Neil 132, 139–42, 147, 153

Hattersley, Roy 132 Healey, Denis 131 Heath, Edward 131 household analogy 46, 83, 87, 99, 157, 213, 230

labour-market reform Agenda 2010. See Agenda 2010 Third Way. See Third Way Labour Party Attlee, Clement. See Attlee, Clement Balls, Ed. See Balls, Ed Blair, Tony. See Blair, Tony Brown, Gordon. See Brown, Gordon budget responsibility lock 3, 128, 156, 224 Callaghan, James. See Callaghan, James Corbyn, Jeremy. See Corby, Jeremy Cruddas, Jon. See Cruddas, Jon Darling, Alistair. See Darling, Alistair Darling Plan. See Darling Plan Denham, Jon. See Denham, Jon double whammy 34, 132, 157 fiscal credibility rule 167, 235 Foot, Michael. See Foot, Michael Hattersley, Roy. See Hattersley, Roy Healey, Denis. See Healey, Denis Jenkins, Roy. See Jenkins, Roy Johnson, Alan. See Johnson, Alan Kinnock, Neil. See Kinnock, Neil McDonnell, John. See McDonnell, John Miliband, Ed. See Miliband, Ed New Labour. See New Labour People’s Assembly Against Austerity 164 Reeves, Rachel. See Reeves, Rachel Skidelsky, Robert. See Skidelsky, Robert Starmer, Keir. See Starmer, Keir Third Way. See Third Way Lafontaine, Oskar 174, 181, 206 Lehman Brothers 1, 12, 56, 63, 67n, 136, 176, 197 long-term growth 49–52, 186, 230–2, 241

ideology 54–6, 60, 76–8, 88, 95–100, 208 ideational pressures 12–14, 24–7, 48–58, 157–63, 197–205 ideational stickiness 62, 233, see also stable party positions ideational trap 15–16, 25, 55–6, 206, 229 IMF. See International Monetary Fund (IMF) inequality 4, 29n, 33–4, 48, 152, 241 inflation aversion 84 internal devaluation 87 International Monetary Fund (IMF) 2, 65, 131–2, 144, 158–61, 219, 230 inter-paradigm borrowing 142 investment gap 20, 195 Ireland 2–6, 19, 33–8, 67–75, 88–92, 215–19, 236 issue emphasis 61, 68–71 Italy 2–6, 19–23, 33, 67–75, 88–103, 110, 118–24, 215, 235n–6 Jenkins, Roy 132 Johnson, Alan 149–50 Kahrs, Johannes 188, 194–6, 201–3 Kalecki, Michal 85 Keynesian consensus 1, 130 Keynesianism automatic stabilizers 29n, 37, 141–3, 182, 238 demand stimulus 85, 129, 141, 158, 172, 191, 201–7 lack of aggregate demand 14, 166, 231 multiplier effect 41, 161

Maastricht criteria 32n, 38, 176, 181 Macpherson, Nick 144 managerial approach to politics 11, 45, 232, 243

274

Index

Marxism 172 mass media 11–12, 42–6, 66–70, 83, 111, 147, 152, 159, 189, 195, 201, 216 McDonnell, John 164–7, 235 Mélenchon, Jean-Luc 16, 57, 238 Merkel, Angela 170–8, 187–94, 197–8, 208 Miliband, Ed 20, 50, 129, 140, 149–66, 234–5 moderate left parties. See centre left parties monetarism 13, 48, 130–4 monetary policy 2–5, 11–13, 32–4, 51, 134, 150–3, 162, 202, 244 loose monetary policy 34 superiority of monetary policy 162, 202 unconventional monetary policy 2, 16, 240 neoliberalism 4–7, 30–2, 39–40, 52, 228, see also ordoliberalism neoliberal convergence 60–3, 78, 85, 136, 177 Netherlands 5–8, 19, 33–6, 67–75, 88n, 92, 176, 215, 236 New Keynesianism 13, 24, 48–51, 142, 171, 232 New Labour 51, 134–6, 141–7, 151–6, 161–5 Obama, Barack 4 office-seeking 12–14, 43–6, 54, 58, 233–4 Oppermann, Thomas 190, 194–6 ordoliberalism 8–9, 13–14, 24, 40, 52, 171–3, 204, 232, see also neoliberalism Organisation for Economic Co-operation and Development (OECD) 82, 161 Osborne, George 148, 152–6, 161–2 output gap 50–1, 153, 161, 232 Overton window 233 paradigm change 4, 14–17, 39, 53–4, 58, 64, 132, 165, 233 partisan theory 9–10, 73 party brands 17, 25, 45–9, 158, 213, 229, 237–8 party positions 22, 61–8, 73f, 86 adaptive party positions 62–3 stable party positions 62–3 path dependency 15, 64, 129, 165, 206, 233 Phillips curve 27, 130 Podemos 16, 57, 80, 226, 238 Polanyi, Karl 4, 244

policy positions 103, 107–11 policy priorities 103, 108, 110–14, 123 political business cycles 31n, 32, 80–1 political sociology of political economy 10, 27 populism 2, 32, 64, 227, 238–41 Mélenchon, Jean-Luc. See Mélenchon, Jean-Luc Podemos. See Podemos Syriza. See Syriza Portugal 2, 6f, 8, 16–19, 33–6, 57, 65–9, 71f, 73f, 75–8, 91f, 215–19 Poß, Joachim 182–3, 185–6, 188, 192, 203 potential voters 25, 58, 211, 214 process tracing 18t, 21, 24, 128–9, 140, 171–2, 180 progressive consolidation thesis 13–16, 52–7, 119, 163, 171, 185, 194, 202 fiscal responsibility in the national interest 163 intergenerational justice 194 public choice theory 81 public debt aversion. See debt aversion public deficit. See government deficit public investment 34, 133, 175, 182, 195–6, 203, 208, 241 public opinion 11–16, 18t, 22–4, 41–7, 54–8, 86–92, 96–108, 120, 156–7, 188–90, 197–200, 231–4, 242–6, see also public preferences public preferences 19, 80–1 public spending 3–5, 32, 107–9, 135, 141, 220–1, 231 consumption spending 113 investment spending 113, 141, 156–8, 162 QE. See quantitative easing quantitative easing (QE) 142, 153, 162, 240, 244 quiet politics 39 raison d’être 3, 25, 242 Reeves, Rachel 154, 156, 161 responsiveness 108, 237 salience issue salience 61, 69f, 70f, 72, 246 salience of economic issues 64, 69–72 salience of public debt 45, 213, 229–34, 237, 243

Index Sch¨afer-Gümbel, Thorsten 189, 193, 207 Sch¨auble, Wolfgang 102–7, 170 Schiller, Karl 172–5, 187–95 Schmidt, Helmut 173–4, 228 Schneider, Carsten 185, 190–9, 202–3 Schr¨oder, Gerhard 31, 174–5, 181–91, 206, 234 Schuldenbremse. See debt brake Schwan, Gesine 188, 190, 199, 205 Schwarze Null 3, 20, 170, 194–5, 203 secular stagnation 4, 239 Shadow Chancellor 132, 149–50, 167, 235 Skidelsky, Robert 145, 149, 153 social democracy 55, 175, 208, 210–17, 236–47 social democratic ideas social justice 64, 163–4, 172, 109, 208 solidarity 64, 172, 188–9 social investment 13, 24, 48–52, 119, 163, 203, 232 social movements 4, 60–2 Spain 2–8, 16–19, 23, 32–6, 57, 67–9, 75, 92, 103, 110, 118, 124, 215, 226 SPD Agenda 2010. See Agenda 2010 Binding, Lothar. See Binding, Lothar Brandt, Willy. See Brandt, Willy Eichel, Hans. See Eichel, Hans Gabriel, Sigmar. See Gabriel, Sigmar Godesberger programme 172 Kahrs, Johannes. See Kahrs, Johannes Lafontaine, Oskar. See Lafontaine, Oskar market social democracy 175 Oppermann, Thomas. See Oppermann, Thomas Sch¨afer-Gümbel, Thorsten. See Sch¨afer-Gümbel, Thorsten Schiller, Karl. See Schiller, Karl Schmidt, Helmut. See Schmidt, Helmut Schr¨oder, Gerhard. See Schr¨oder, Gerhard Schwan, Gesine. See Schwan, Gesine Seeheimer Kreis 201–3, 206 Stegner, Ralf. See Stegner, Ralf Steinbrück, Peer. See Steinbrück, Peer Steinmeier, Frank-Walter. See Steinmeier, Frank-Walter Thierse, Wolfgang. See Thierse, Wolfgang split survey experiment 23, 124 Stability and Growth Pact (SGP) 32, 37, 176, 194

275

stability culture 87, 92, 99, 126 stagflation 29–30, 48–9, 130–1, 173, 211 Starmer, Keir 167 Stegner, Ralf 181, 186–8, 200 Steinbrück, Peer 1, 181–9, 201 Steinmeier, Frank-Walter 186–9, 201 supply-side economics 13, 24, 48, 171, 191, 204, 243 supply-side Keynesianism 16, 48–58, 129, 134, 163, 201–7, 232–3 supply-side reforms 31, 56, 175, 191, 206, 232 Swabian Housewife 197–9 Switzerland 19, 67–9, 75 Syriza 16, 57, 78, 80, 226, 238 taxation direct taxation 133 level of income taxes 133 progressive taxation 103, 105, 121, 126 progressivity of income taxes 113 technocratic approach to politics 10–15, 42–53, 173, 232, 237, 243, see also managerial approach to politics Thatcher, Margaret 3, 30, 48, 128, 132, 148, 157 Thierse, Wolfgang 185, 187, 195, 200 Third Way 4–17, 22, 30–1, 45, 55–8, 61, 77, 129, 133–9, 163–5, 174, 203, 211, 228–43 time-series analysis 21, 211, 216–17, 226, 236 trade unions 28–30, 37–43, 55, 62, 131, 146–9, 164–71, 183–5, 199, 235 trade-offs 19, 27, 34, 52, 101, 102–26, 213, 231, 240–6 United Kingdom (UK) Alexander, Douglas. See Alexander, Douglas Bank of England. See Bank of England Barber boom. See Barber boom Beveridge Report. See Beveridge Report Cameron, David. See Cameron, David Conservatives 128–38, 144–58, 166–71, 235 Heath, Edward. See Heath, Edward Labour Party. See Labour Party Liberal Democrats 129, 148–51 National Economic Council 142

276

Index

United Kingdom (UK) (Continued) New Labour. See New Labour Osborne, George. See Osborne, George tax bombshell 157, 132 Thatcher, Margaret. See Thatcher, Margaret Tories 148–52, 166, 236 Trades Union Congress (TUC) 146 UKIP 154, 226 White Paper on Employment Policy 130 Wilson, Harold. See Wilson, Harold Winter of Discontent. See Winter of Discontent United States (US) 40–1, 49–52, 63

Carter, Jimmy. See Carter, Jimmy Clinton, Bill. See Clinton, Bill Great Depression. See Great Depression Lehman Brothers. See Lehman Brothers Obama, Barack. See Obama, Barack valence issue 47, 80, 100, 166, 207, 213, 226, 237 voter preferences, inconsistent preferences 104 vote-seeking 61 welfare state retrenchment 78, 82 Wilson, Harold 131–2 Winter of Discontent 132, 158, 131