The European Third Way
I have a theory, though lack statistical evidence to support it, that the Third Way trope is a phenomenon that recurs every three years, with deep troughs and high peaks occurring more or less every 30 years. It’s a Schumpeterian wave-like process driven by hostility to capitalism.
Yesterday Lord Robert Skidelsky wrote at Project Syndicate on impressions he had gleaned from a 2001 stay at the Caracas Hilton where he attended a Third Way conference. Robert discussed the nature of leftwing populism in Venezuela. It may not have been his intention, but he was able to describe a situation, typical of many populist regimes in many Latin American countries, from at least 1945 onwards, in which the largesse (in this case the Chavez cheque book) on which populism rests is paid for either by milking the cash cows of monopolistic state enterprises or by foreign debt - and eventually a combination of both.
It has been an unsustainable model for reasons that don’t need repeating ad infinitum. I describe Latin American economic populism in some detail in my book Capitalism, Institutions, and Economic Development. I have lived for at least eleven years in at least three or four different Latin American countries. The story is familiar to me.
Robert then adds, however, that “Chávezism may well prove to be a significant phenomenon far beyond its Latin American homeland”. I could be wrong, but I suspect he may have in mind the troubled European periphery (he surely cannot be thinking of Africa, because that is a region where capitalist economics has a promising future).
My analysis of the situation is different. At this moment Europe is already deeply stuck in an unintended and ironic Third Way, represented symbolically by Germany’s 30% contribution to every euro that is paid out by the European Stability Mechanism (ESM), mainly in so-called ‘bailouts’. And, it is in these bailout countries that a form of Chavismo (as they call it in Italy, Spain) could be developing wave-like formations.
The European Way that I and many non-Keynesian economists would prefer is a more evolved form of the Washington Consensus, i.e. a market-competition promoting structural reform model - a model that includes the key institutional enhancements that for one reason or another never reached fruition in the original Washington Consensus.
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This would represent an effort to keep German voters/taxpayers onside so as not to threaten the generous ONE-THIRD contribution they are already making to the European rescues-cum-reforms.
Chavismo in Europe would bring to an end the current ironic Third Way, the status-quo of incremental muddle-through sustained by Germany’s 30%, which is preferable to revolution. I predict Chavismo in Europe would be a Fourth Way, a refusal to reform, largely unchartered territory, taking the shape either of massive capitulation to the unsustainable policies of populists, or Germany’s exasperated but pragmatic exit from the intolerable EU/Eurozone that European Chavismo will have created.
Those are the least bad outcomes. With Russia playing around the edges, and the possibility of instability in Asian oceans, the emotional rhetoric that characterises Chavismo would endanger European peace.
Countries must reform now to avoid Chavismo, they must go through their inevitable populist-decay phase, and emulate the Latin American exit from their similar crisis in the 80s. They need a new-style Washington Consensus with institutional enhancements -- making certain, for example, that the market reforms are not hijacked by cronyism. Call it the Berlin Consensus, the Rome Consensus, or the Madrid Consensus, it does not matter.
There is no point in hoping China will continually prosper and that commodity prices will continually rise, and not much point in assuming the relative decline of the USA is bound to worsen. Western financial collapse was, in the final analysis, a collapse brought about by a Third Way (in the UK it was Labourism) that left countries exposed to, and unprepared for, Black Swans. The problems were different in style, scope, and intensity, of course, but not dissimilar in quality and nature to the ones Robert Skidelsky describes in Venezuela. The only solution is to go back to the First Way, start over, learn it better - Viva capitalismo.