Leader: Is this the end of the European welfare state?

The task of articulating a convincing alternative to market liberalism is a formidable one.

The Keynesian consensus that took hold after the Great Crash of autumn 2008, and which conso­lidated around the need for fiscal stimulus and bank bailouts in the wake of the near collapse of the global financial system, has broken down spectacularly quickly. It has been replaced, as Mehdi Hasan points out in his politics column on page 12, by a consensus on austerity.

On 7 June, the Prime Minister declared that reducing "our massive deficit and growing debt" was the single most pressing task facing the coalition government. The cuts that David Cameron proposes to begin to grapple with the deficit, and which George Osborne will set out in his emergency Budget on 22 June, will, he says, affect "our whole way of life".

The public finances are certainly in a dire state, and the deficit is our biggest in the postwar period, at more than 11 per cent of GDP. But Mr Cameron went further: he said the situation is "even worse" than the Tories had feared before the election. That assertion is undermined, however,
by a recent report by the Office for National Statistics which revised down the level of government borrowing last year from £163.4bn to £156bn.

Mr Cameron's sleight of hand with the figures drew a stinging response from the former chancellor Alistair Darling, who now appears to be dissenting from the austerity consensus that he helped to build while still in office. Mr Darling denied that there are things we know now about the public finances that we didn't know when he made his last Budget statement in March. "This is a clear case," he argued, "of the Tories seeking to blame the previous government in order to push through ideological cuts in public services."

Mr Darling has a point, and he can call on the authority of leading economists in making it. For example, Robert Skidelsky, writing in the New Statesman last month, argued that the fiscal crisis was "mainly the result of the deterioration in the economy". In other words, it is the recession, and not excessive public spending, that is largely responsible for the worsening of the government's finances.

This analysis is supported by the International Monetary Fund's Fiscal Monitor, which also makes clear, contrary to the assertions of Mr Cameron and Mr Osborne, that it isn't a UK crisis alone. The government's "gross financing needs" - put simply, the national debt as a proportion of GDP - are lower than, say, those of France, the US and Japan.

What is more, the head of the IMF, Dominique Strauss-Kahn, has warned that deficit reduction programmes, in Britain and elsewhere, should be calibrated in such a way as to ensure that they do not "undermine the recovery". The threat of a double-dip recession remains real, a point emphasised by the US treasury secretary, Timothy Geithner, in a 3 June letter to his G20 counterparts ahead of their recent meeting in South Korea.

These are essentially arguments about the timing of fiscal retrenchment, however, not about its desirability; the consensus on austerity is Europe-wide, not to say global. In Germany, for instance, Chancellor Angela Merkel is proposing a package of budget cuts and tax increases unprecedented in peacetime. German welfare benefits will be slashed and the unemployed will lose some entitlements: until now, these have been among the most generous in Europe.

As Mrs Merkel said long before the current crisis began, "without growth, it [is] not possible to practise solidarity". In other words, the "European social model" - the system of universal benefits and public services designed to provide all citizens with a platform of opportunity and security - is under grave threat.

The candidates for the Labour leadership, all of whom appeared at the New Statesman debate in Westminster on 9 June, the first to be held after nominations closed that day, would do well to take note. Each of them acknowledges that the global recession has destroyed New Labour's economic policy. This borrowed the worst aspects of old-style social democracy - the mistaken assumption that growth is endless - while ditching its best, the belief that the responsibility of government is to reduce poverty and inequality.

It is much less clear, however, what might replace this model, not least because the "social market" way of organising economic and social affairs, which has prevailed on the European continent since the war, is itself in peril. This makes the task of articulating a convincing alternative to
the market liberalism of the Con-Lib coalition all the more difficult. Whoever becomes Labour leader will have a monumental struggle.