How French Socialism Built — and Destroyed — the European Union

Center-left parties are in trouble across Europe, and the French Socialist Party is no exception. Although Socialist François Hollande is currently president, his party has suffered heavy losses in recent regional and departmental elections and his approval rating has fallen below 15 percent. With a presidential election looming early next year, the 38-year-old Emmanuel Macron, who served as Hollande’s economic minister before resigning on Aug. 30, has emerged as the president’s most vocal centrist critic and prominent presidential rival, promising to revitalize the left by rejecting old dogmas and even the label “socialist.”

But the dire state of French Socialism doesn’t just reflect the European left’s problems — it offers a case study of their origin. At the root of the broader European crisis, and the specific predicament of the European left, is a political vision that the left — above all, the faction of the French left represented today by Macron — is itself responsible for enacting. Rather than a step toward a new future for the left, Macron represents a determined march toward a disastrous past.

The political maneuvering in Paris might suggest that the troubles of the French left are of recent origin, little more than a reaction against Hollande’s reneging on his pre-election pledge to renegotiate the austerity accords that his predecessor had signed with German Chancellor Angela Merkel. The truth is quite different. The troubles of the French left, like those of the European left more broadly, are rooted in its embrace of a faulty diagnosis of the evolving global economy in the 1980s. To be sure, Germany’s insistence that austerity is the only remedy to economic stagnation does not help, but Germany’s ability to dictate economic policy to its neighbors is itself a consequence of reforms pushed by French Socialists in the 1980s and ’90s.

Those reforms trace back to the early years of François Mitterrand’s presidency. In 1981, Mitterrand was the first leftist to win the presidency since the inception of the Fifth Republic in 1958. As promised in his campaign, he proceeded full speed ahead with a program of nationalizations and economic stimulus intended to revive the country’s flagging economy.

It was not a propitious moment for such policies, however. The advanced industrial countries were suffering from a combination of stagnation and inflation, and Ronald Reagan and Margaret Thatcher insisted that these ills must be combated by deregulating, cutting taxes, raising interest rates, and reducing the size of government. The French soon discovered that it would be very difficult indeed to maintain “socialism in one country” while remaining committed to free trade within the European Community (as the European Union was then known). The elimination of barriers to trade was of course the very raison d’être of the European Community. To make matters worse, French capitalists, frightened by a left-wing government, began to move capital out of the country in defiance of capital export controls, which European treaties at that time explicitly permitted. These capital flows, coupled with pressure from currency speculators, forced the Socialist government to defend the franc, depleting French reserves.

Within two years of taking power, Mitterrand therefore confronted a difficult choice. He could either reverse course, reduce the budget deficit, and fall in line behind the neoliberal “Anglo-Saxon” leaders, or he could sever France’s ties to the European Monetary System, allow the franc to float, and tighten exchange controls, thereby raising French energy costs, inhibiting exports, and interfering with travel by French citizens.

A bitter battle ensued within the Socialist leadership, with Finance Minister Jacques Delors leading the fight for austerity. His guiding principle was that no government was powerful enough to challenge financial markets head on. The responsible policy was therefore not to buck the market but rather to shape it with appropriate rules.

Delors’s camp emerged victorious. Subsequently, just two years after the fateful policy reversal in which he had played such a prominent part, Delors became president of the European Commission (EC). In his new role he pursued an agenda consistent with the arguments he had made while serving as French finance minister.

However powerful the economic arguments for changing course may have been, strategic geopolitical arguments weighed equally heavily on Mitterrand’s decision. Retaining close ties to Germany was an essential goal for a president who had been a prisoner of war in World War II. Not antagonizing the Americans also counted for this Socialist mindful of the fate of socialism in Salvador Allende’s Chile.

While Mitterrand worried mainly about the balance of power, Delors, both as Mitterrand’s finance minister and later as EC president, worried about the changing nature of the global economy. Like other high-ranking French civil servants who leaned left politically, Delors had become convinced that the old left-wing economic nostrums—nationalization of key industries, state economic planning, resistance to industrial restructuring in the name of worker protection — were a symptom of backwardness. He was therefore determined to “modernize” the French approach to economic management in order to meet the challenge of globalization.

Although the term “globalization” was not yet in widespread use, nor was China yet the economic behemoth it has since become, Western leaders were already concerned about competition from Japan and could foresee the consequences of reduced transportation costs owing to containerization. Low-wage countries were becoming formidable competitors in certain industries, and when not competitors they were assuming new roles as links in globally extended supply chains. Delors believed that the future of social democracy depended on meeting the challenge of globalization.

With this picture of the emerging global economy in mind, Delors and his staff proposed an ambitious reworking of the existing blueprint for economic cooperation in Europe. They would create a “single European market” with much freer movement of goods, people, and services across borders than ever before. But free movement in those three categories had always been part of the European ideal. What was new in 1985 was the proposition that capital should also be allowed to move freely across European borders.

For Delors, there were two reasons to grant freedom of movement to capital, and both were consistent with his commitment to social democracy. One was a simple matter of fairness. Already as finance minister of France he had concluded that capital controls were ineffective. The wealthy circumvented them easily, while middle-class people with savings were prevented from seeking higher returns on their investments and inconvenienced when traveling abroad. The second reason was strategic: In order to keep Europe competitive in the coming global economy, firms would need to scale up and reorganize in such a way as to take maximum advantage of existing wage differentials and gains from trade.

As a result of Delors’s efforts as president of the EC, the rules governing capital movements in Europe were consequently rewritten. The story is well told in Rawi Abdelal’s Capital Rules, a title that neatly captures the double-edged nature of the reform. The commission’s actions reflected the conclusion that capital dominates the global economy, but at the same time they embodied the conviction that a proper set of rules applicable to all countries could make the domination of capital less inequitable. In particular, Delors worried about the outsized role of U.S. banks in the global financial system. Bilateral agreements between the United States and counterparties allegedly enhanced American domination of global finance. His remedy was to eliminate such bilateral agreements in Europe by requiring all EU member states to accept a common set of rules governing their relations to private-sector financial institutions.

By favoring rules formulated in what the EC took to be the “general interest” (as good French technocrats steeped in Rousseau liked to call it) over banker discretion, the hope was that freer capital would also become fairer capital. A preference for rules over discretion was also calculated to appeal to the Germans, who, with memories of repeated episodes of savings whittled away by inflation firmly fixed in mind, tended to mistrust financial arrangements dependent on the whims of politicians. And Delors was already laying the groundwork for the future unification of European national currencies and their replacement by the euro, which was to be the capstone of the strategy for enhanced global competitiveness. This would require German cooperation.

Delors’s European Commission failed to consider some well-known drawbacks of free capital movement, however. If freer movement of capital encouraged companies to expand their operations beyond national boundaries, that goal might still have been achieved by limiting capital flows to foreign direct investment, which companies have an incentive to monitor closely, while banning the loosely monitored “hot money” that flows to countries enjoying boom times only to flee in panic when the boom suddenly ends, accelerating the downturn.

We know how the story ends. Deregulated capital flowed freely into countries like Greece and Spain when times were good, encouraging excessive borrowing at unrealistic rates of interest. The Germans had exacted a price for their agreement to rules crafted mainly by French technocrats, namely, a banning of any form of “transfer union” and penalties for failure to adhere to the German idea of fiscal discipline, based on the famous schwarze Null, the idea that state budgets should be balanced in almost all circumstances. These commitments provided the justification for the damaging austerity policies that were imposed on Europe after the financial crisis of 2008, with much unnecessary suffering across the continent, not least in France.

The intentions of Delors’s European Commission were good, and based on lessons learned from hard French experience. But the road to hell is often paved with good intentions, and the lessons of experience are sometimes precisely the wrong ones to apply when conditions change. What, if anything, can be done to cast off the shackles imposed by the well-intentioned but misguided reforms of the past? Hollande’s leftist challengers (Benoît Hamon, Arnaud Montebourg, and Cécile Duflot) all propose various versions of the “socialism in one country” formula rejected by Mitterrand in 1983. This solution is not likely to be viable for the same reasons that Mitterrand himself was forced to change course.

On the other hand, Macron, to Hollande’s right, is unabashedly in the Delorsian mold, favoring deregulation everywhere in the hope that it will enhance growth. In 2016, however, deregulation represents not “modernization” but more of the same failed neoliberal policies that led to the economic crisis in the first place.

Meanwhile, Italian Prime Minister Matteo Renzi has been arguing for greater fiscal flexibility in order to make room for a dose of Keynesian stimulus. Even the IMF now agrees that this would be a good idea, and Renzi may at last have succeeded in convincing Merkel that the post-Delors left has arrived and that a New Deal for Europe is the only way forward. But steps in the direction of a more sensible European social democracy thus far remain halting and tentative. And as long as that remains the case, Europe’s prospects will remain bleak.

Photo credit: GABRIEL DUVAL/AFP/Getty Images