A turning point in the final fortnight of the referendum campaign was the news, breathlessly reported by the BBC, that stocks in Scottish banks were falling. What had been a mere threat of financial disaster became a reality for newscasters and for those voters who listen to them.
The actual movement in price was modest and the story overhyped, but the fear it spoke to was real and rational. Ever since Nixon moved the world to a system of freely tradeable currencies in 1971, every country has faced the threat of capital flight. Capital flight is when investors pull their money out of a country in tremendous quantities. It cripples investment, brings about high unemployment, and often forces governments to rack up large debts to prevent a collapse in the value of their currency.
Joseph Stiglitz, winner of the Nobel Prize in Economics and a member of the Scottish Government’s Council of Economic Advisors, calls this “hot money” – it flows into a country looking for a quick return, and leaves just as quickly at the first sign of trouble. Thus a minor political move – say, the decision of a Tory-owned financial institution to move its HQ – can lead to a bank run on an entire country. People who were involved in the movement for global debt justice, symbolised by the “Battle in Seattle”, will remember capital flight as one of the methods used to discipline developing nations and keep them on the neoliberal path. What is less well known is that capital flight came to Europe first.
In April 1976, James Callaghan became Prime Minister. Harold Wilson had resigned after the Labour left rejected his economic programme, and Tony Benn and Michael Foot were in government. They pursued the kind of Keynesian programme that Jeremy Corbyn now proposes: interest rates and government spending were used to fight unemployment, pensions and benefits payments rose, workers rights were strengthened. By September, currency speculators were hammering the value of the pound. Callaghan was forced to take a loan from the IMF, who demanded austerity as their price. Austerity and monetarism – the use of unemployment to control wage increases – began under Callaghan, not Thatcher.
Social Democracy had been so successful that it was undermining profits, and in the 70s and 80s European voters were forced to choose between dismantling Social Democracy to save profits, or moving towards Socialism. The same dynamics played out across Europe, and as in Britain, French voters tried moving left first.
In 1981 Francois Mitterrand came to power with a radical programme for a peaceful transition to Socialism. Arguably his experience tells us what might have happened if Michael Foot’s Labour Party had beaten Thatcher in 1983 and implemented Bennite (Corbynite?) policies. Industries were nationalised, welfare spending drastically increased, a wealth tax introduced. For the first time since world war 2, capital-C Communists formed part of the government. Sadly, Callaghan’s experience replayed itself. By 1983 capital flight and a collapsing Franc forced Mitterrand to turn to foreign loans, with austerity as the price demanded by creditors.
The implication is stark for the European left: voters chose Socialism, but in a world of globalised finance no one country can be a social democracy of the kind we saw from 1945-1979. The only countries who can stand up to the global financial sector at all are the likes of America, China, and Brazil – giant countries, near-continental in size. Even posterchild Iceland restricted itself to jailing local spivs in the wake of a complete collapse. It did not and can not disentangle itself from the global banking system.
There have been two main responses to these uncomfortable facts: surrender and denial. Under Clinton, Blair, and Hollande, Social Democrats abandoned any challenge to centralised private ownership and concentrated wealth, instead focussing on post-market income redistribution. This led to spiralling inequality, because wealth produces so much income that it cannot all be redistributed.
Meanwhile the radical left has been gripped by denial, preferring to blame our failure on individual bad people, from Thatcher and Blair to Sheridan and Tsipras. This is a tragic abandonment of the left tradition of looking for structural rather than individual causes.
Once we accept the lessons of the defeat of Social Democracy, we can start to draw up realistic plans. Prime Minister Corbyn or an independent Scotland will not and cannot restore the postwar settlement. In Scotland, we might manage to ape the atrophied and weakened Social Democracy that still exists in Scandinavia. At a UK level, even that is impossible without first repressing the City of London, which would devastate tax revenues and the balance of trade.
No policy, no matter how radical or well-intentioned, can avoid these problems. Social Democracy worked so well that it forced a crisis, a revolutionary situation. It failed for the same reasons that every attempt to build socialism in one country has failed: capitalist powers combine to blockade and if necessary invade any threat to the system. This begs the question of how we avoid denial without surrendering. The clue might lie in Mitterand’s new policy after 1983, to pursue European integration at all costs.
Capitalists have always had a contradictory relationship with the state. They need the state to create markets and defend them from the poor (“For one very rich man there must be at least five hundred poor … It is only under the shelter of the civil magistrate that the owner of that valuable property … can sleep a single night in security.” – Adam Smith), but a state powerful enough to make a market is powerful enough to regulate it and to redistribute wealth from rich to poor.
Socialists face the same dilemma as the capitalists: we want to abolish the capitalist state, built as it is to defend the interests of the powerful, but the state is one of the few weapons capable of matching the power of the capitalists.
Capitalists must always build a state large enough to create the markets they need. For a common market across the British Empire, capitalists needed the British Imperial state. For a common market across Europe, capitalists have created the outlines of a federal European state.
While the EU is currently an enemy of Social Democracy from Scotland to Greece, the EU is also the smallest possible state capable of implementing Socialism or even Social Democracy in Europe.
There is a tendency in Britain to blame “the EU” as though it is a government apart, but in fact EU policy is largely driven by national governments in the Council of the European Union. The so-called European Parliament is actually a second chamber like the House of Lords. It is the national governments who appoint the Commission and the national governments who control the equivalent of the Commons. We have a right-wing EU because we have right-wing European governments.
If we want to match the power of finance capitalists and end austerity, our only hope is an international movement to win an anti-austerity majority of European governments. If we want Socialism, we must win a Socialist majority across Europe.