Across Europe the centre-left is in decline. The leader of Denmark’s Social Democratic party, Mette Frederiksen, has recently given her take on how to reverse this trend.
Frederiksen states that the centre-left’s weakness stems from the breakdown of a social contract that combined “an effective market economy … with a strong welfare state”. This social democratic “recipe”, as she calls it, allowed societies to be both rich and fair, and its unravelling has contributed to rising inequality and growing economic insecurity. Given that the historic mission of social democrats is to rein in capitalism’s worst excesses, this situation has resulted in the centre-left losing many of its traditional supporters to populists.
Frederiksen isn’t saying this recipe is defunct, however. She argues that the social contract it sets out remains as relevant as ever, precisely because it seeks to ensure that markets serve citizens and everyone is secure. Where the centre-left has erred is in failing to adapt this recipe to the challenges of globalisation, and in particular to the challenge of raising tax revenues.
Globalisation effects tax in two important ways. On the one hand, it encourages tax competition between states. In a hyper-mobile environment, large companies are often in a position to pick and choose where to base their business activities. Countries are therefore under pressure to attract firms, which invariably means they cut corporation tax. But since other states have the same motive, a race to the bottom ensues.
On the other hand, globalisation makes it easier for companies to book their profits (or for rich people to hide their wealth) in tax havens. Tech giants such as Amazon and Google – quintessential global businesses – do this sort of thing. And according to the European Commission, the result is that they pay 9.5% in corporation tax on average compared to the 23.3% paid by more traditional firms. This deprives states of billions in revenue and, as Frederiksen says, fuels “the engine of inequality”.
So, for Denmark’s centre-left leader, the broken social contract, rising economic insecurity, and growing support for populists are rooted in the global environment. Essentially, globalisation has weakened government’s ability to control markets and extract the resources it needs to fund a strong welfare state. As Frederiksen states, “voters cannot be blamed for reacting when the fruits of globalisation are distributed unjustly”.
But what should the centre-left do about this? One “of the main vehicles for reinforcing the social contract” is the EU, says Frederiksen. Member states could stop competing with one another and agree to a “common floor for corporation tax”. And “Europe-wide legislation” could be enacted to stamp out “aggressive tax planning”. This is the agenda she thinks social democrats should pursue.
One problem with this prescription is that it has been tried before. The Organisation for Economic Cooperation and Development, a group of mostly rich countries, has been attempting to implement the type of measures called for by Frederiksen since 2013, through its Base Erosion and Profit Shifting initiative. But progress has been minimal at best.
The EU itself has sought to address the non-taxation of tech firms, proposing a so-called digital tax. Yet agreement among member states on how – or indeed whether – this should be implemented has been hard to come by. This is partly due to fear that such a tax would stifle investment. But it is also because some member states see the proposal as going against their national interest. Ireland, for instance, has a low tax regime and it would suffer costs if this scheme was carried out.
Another problem, one entirely ignored by Frederiksen, is immigration. It’s not just economic insecurity that has fuelled support for populism. Cultural anxiety has been just as important, if not more so. Social democrats have said little about this issue, preferring to dismiss anti-immigration sentiment as a product of bigotry or an epiphenomenon of economic insecurity. They can’t keep doing this, not least because immigration is linked to the sort of social contract they want to revive.
As much economics[*] and political science[†] research shows, the more ethnically diverse societies become the less they spend on public goods provision. A key reason for this is that, overall, the majority in such societies resent their taxes being used to benefit people they perceive as ‘outsiders’. In other words, high levels of immigration would seem to discourage support for redistributive policies. It is therefore imperative that this issue is addressed by the centre-left.
Can social democracy respond to the national and ethnic divisions that block the goal of a renewed centre-left social contract? Eduard Bernstein, the intellectual founder of social democracy, may be useful here. He argued that, in order to advance its goals, the centre-left must appeal to “feelings of common humanity”. How to make such appeals effective in the twenty-first century is perhaps the first step in creating the global and inter-ethnic solidarity needed to rebuild social democracy.
[*] Alberto Alesina, Reza Baqir, and, William Easterly, ‘Public Goods and Ethnic Divisions’, Quarterly Journal of Economics, 114:4, 1999, pp. 1243-1284
[†] James Habyarimana, Macartan Humphreys, Daniel N. Posner, and, Jeremy M. Weinstein, ‘Why does ethnic diversity undermine public goods provision?’, American Political Science Review, 101:4, 2007, pp. 709-725