The Collapse of the Postwar Consensus

The 1970s marked a watershed moment in European political economy. The economic crisis of the early 1970s gradually eroded the optimism that had characterized Western Europe during the postwar decades, leading to the decline of traditional conservative parties and bringing previously marginal issues to the forefront of public debate. As Margaret Thatcher famously asserted, “There is no such thing as society,” reflecting a fundamental shift in political thinking that would reshape the continent.

The postwar social democratic consensus and its intellectual foundation in neo-Keynesian economics came under intense scrutiny. By the late 1970s, Europeans began recognizing the enormous costs hidden behind their successful welfare state systems. The baby boom generation was entering middle age, and government statisticians had long warned about the impending burden of pension provisions for this demographic bulge. Early retirement trends exacerbated the pressure on government budgets – in West Germany, for instance, the percentage of 60-64 year old men in full-time employment dropped from 72% in 1960 to just 44% two decades later.

Demographic Time Bomb and Economic Stagnation

Europe faced an unprecedented demographic challenge. The postwar baby boomers represented the largest generation in recorded European history, and within years they would cease contributing tax revenue while beginning to draw heavily on public funds through pensions and increased demand for healthcare and social services. Compounding the problem, this generation enjoyed better living conditions than their predecessors and could expect longer lifespans.

The welfare state had been built on two implicit assumptions: continuous economic growth at 1950s-60s levels, and birth rates substantially exceeding retirement rates to ensure a new generation of taxpayers. Both assumptions now proved faulty, with population replacement rates falling below sustainability across Western Europe. By the early 1980s, only Greece and Ireland maintained the necessary 2.1 children per woman replacement rate, while West Germany stood at 1.4 and Italy’s figures continued to decline sharply.

The Rise of Neoliberal Critique

The crisis gave new voice to critics of the Keynesian consensus. These “neoliberals” argued that most state-controlled services – including finance, housing, pensions, healthcare, and education – would operate more efficiently if returned to private enterprise. Austrian economist Friedrich Hayek, a leading proponent of free-market capitalism, contended that even the best-run governments couldn’t process economic data effectively to formulate sound policies.

While these ideas weren’t new – representing pre-Keynesian liberal orthodoxy – they gained fresh traction after 1973 as free-market theorists confidently blamed economic decline on the failures of “big government” and excessive taxation. Only in Britain would Hayek’s followers gain control of policymaking, fundamentally transforming the country’s political culture.

The British Laboratory: Thatcher’s Revolution

Britain’s transformation under Margaret Thatcher represented the most dramatic break with postwar consensus. The “Iron Lady” came to power in 1979 advocating tax cuts, free markets, privatization, Victorian values, patriotism, and individualism. Her most significant contribution was the doctrine of “rolling back the state” – challenging the notion that government was the natural source of legitimacy and legislative authority.

Thatcher’s policies produced remarkable economic changes. Productivity improved as uncompetitive industries were eliminated, industrial relations restructured, and profitability increased. The privatization of state assets brought windfall revenues to the treasury. Between 1984-1991, Britain accounted for one-third of worldwide privatization by value, transforming industries from telecommunications to energy to aviation.

However, these changes came at significant social cost. Unemployment soared to 3.25 million by 1985 – the highest in Europe – as workers from declining industries like steel, coal, textiles and shipbuilding became permanently dependent on benefits. While government spending as a percentage of GDP remained nearly unchanged from 1977 levels, the distribution shifted dramatically, with wealth concentrating in newly liberated sectors like finance while public services deteriorated.

The French Exception: Mitterrand’s Socialist Experiment

France underwent parallel transformations but through different political channels. Where Britain’s postwar consensus was shattered by a right-wing revolution, France saw its political model broken by the revival and transformation of the non-Communist left under François Mitterrand.

Mitterrand’s 1981 election victory sparked unprecedented celebrations, with supporters envisioning revolutionary change. His government initially pursued an ambitious program including wage increases, reduced working hours, lowered retirement age, and most significantly, an unprecedented wave of nationalizations. Within his first years, Mitterrand’s government brought under state control 36 banks, 2 major financial companies, and 5 of France’s largest industrial firms.

However, by June 1982, facing economic crisis and capital flight, Mitterrand executed a dramatic policy reversal – freezing prices and wages, cutting public spending, raising taxes, and prioritizing inflation control over monetary expansion. This pragmatic turn mirrored the conservative economic policies Mitterrand had previously opposed.

The Privatization Wave Across Europe

The 1980s saw privatization sweep across Western Europe, though implementation varied significantly by country. While Britain pursued the most radical program, other nations adapted the process to local conditions:

– Germany focused on deregulating labor markets rather than mass privatization of already largely private export sectors
– Italy struggled with political resistance from parties benefiting from state-controlled patronage networks
– Spain and Portugal expanded public sectors initially before later embracing privatization under socialist governments
– France maintained strategic state control even while privatizing, carefully managing the transition

European Community (later EU) regulations played a crucial role in pushing member states toward economic liberalization, particularly through requirements for competitive markets that made state intervention increasingly difficult to justify.

Legacy and Lasting Impact

The Thatcher-Mitterrand era fundamentally transformed European political economy. By the 1990s, the notion that an activist state represented the necessary condition for economic growth and social improvement had been thoroughly challenged. Even left-wing parties like Britain’s Labour Party, rebranded as “New Labour,” accepted much of the neoliberal framework.

The transformations produced mixed results. While economic efficiency generally improved, social inequality increased dramatically. Public spaces became increasingly marketized, and the concept of citizenship shifted toward shareholder mentality. Yet core welfare state elements like healthcare and education remained politically untouchable even for conservative governments.

Perhaps the most significant legacy was the normalization of what had once been radical economic ideas. The postwar consensus wasn’t merely destroyed – it was replaced by a new consensus that redefined the boundaries of acceptable policy for generations to come. As Mitterrand himself came to recognize, the true significance of the 1980s transformations was not in immediate policy changes, but in making future alternations of power between left and right “normal” within a fundamentally transformed economic paradigm.