Left-wing critics of the EU point out that neoliberal assumptions are built into its architecture—if only because, as Fritz Scharpf¹ famously argued, it is far easier to secure cross-national agreement on a negative task (breaking down barriers to markets) than on a positive one (finding new institutions to supplement markets). This structurally determined pro-market bias has been heavily reinforced since the late 1990s by a more directly ideological commitment to neoliberalism in the EU’s decision-making organs. As so often in national politics, European policy-makers of right and left alike tend to see markets and public-policy actions as a zero-sum game: if we want more market, we must have less social policy and vice versa. But the history of the 20th century shows us that the opposite is true and that the two need to proceed together.

As Karl Polanyi² demonstrated in his research on the early industrial revolution in 18th-century England, the extension of markets destroys various institutions which stabilised society, creating a need to build new ones to avoid mass insecurity and social chaos. This happens because markets operate by taking that which is profitable and throwing away what does not serve their purpose. Markets therefore create waste—what Pope Francis called lo scarto in a 2018 article for the Italian business newspaper Il Sole 24 Ore³, critical of contemporary capitalism. The Italian word, as well as meaning waste, carries the idea of that which is thrown away. Lo scarto includes human beings whose lives, or even existing ways of life, are not needed by the market, as well as the material waste we now see as environmental harm.

The tendency of unchecked markets is to wreak havoc with human lives and to make the planet filthy. On the other hand, without the creative destruction of markets we should have little innovation and society would remain poor. The intensification of markets requires public policy to save us from their consequences and to save markets themselves from fundamental political attack.

This is not just a matter of defence against the market. Many of its own needs cannot be provided by itself and therefore also require public intervention. Major examples are the infrastructure (physical, as in transport networks, and human, as in education and training) and regulatory frameworks that enable the economy to operate efficiently.

Subject to constraints that safeguard and enhance the market economy itself, as well as protecting us from its damage, the market is a highly efficient form of economic organisation, superior to the state-centred economies which have emerged as its only serious rival. The social-democratic left seeks efficiently regulated but extensive markets rather than their suppression. This stance equips it for leading broader progressive coalitions and for new phases in the development of social Europe.

The EU’s record on these issues is not as negative as Scharpf’s argument implies. First, EU economists’ interpretation of the market order is not as extreme as that found in the US. There is strong competition policy, to ensure that competitive markets mean what they say and not the protection of monopolies, and there are major infrastructure projects, to improve transport and communications, information technology and high-skilled science. These are elements of EU policy-making that the left must support and seek to enhance.

Even more important, national politicians need to shout loudly within their countries that these are things being achieved by the EU, which can be done only through cross-national co-operation. Too often even the most ardently pro-EU politicians seek to take all credit for anything positive in their countries that emanates from the EU, blaming the union for anything negative. This is highly short-sighted and has brought us to the position where xenophobic parties in nearly every European country can treat the union as something that does nothing but impose bureaucratic rules.

It cannot however be denied that there has been a rise in dogmatic neoliberalism in the EU during the past 20 years. Before then, Jacques Delors' presidency of the European Commission, continued by Romano Prodi, seemed to accept the logic of the Polanyian argument. Delors oversaw both the major extension of market processes under the single-market programme and the biggest extension of social policy in its broadest sense – the social chapter of the Maastricht treaty, and the emergence of a European civil society through the commission's networks of contacts with local and regional governments, trade unions, employers' organisations and various citizens' groups. No other international trade organisation has established anything like this rapport with the citizens of its member states.

This episode was however immediately followed by the period when the apparent superiority of the Anglo-American model of unregulated capitalism and insecure labour markets, based on the priority of shareholder interests, led to panic in European capitals. National governments of various political stripes, and under their influence the EU itself, embarked on a programme of intensified neoliberalism. The accession of former state-socialist countries from 2004 brought to EU membership political leaders inclined to see social democracy and the welfare state as indistinguishable from communism. This strengthened the neoliberal turn. Commission leaders went out of their way to stress how social Europe belonged to the past. There were few new initiatives under the social chapter and governments were pressed to reduce workers' rights.

The collapse of the Anglo-American deregulation model in the financial crisis should have signalled that much of its apparent success was due to the inflated growth of unsustainable secondary markets. To some extent this has happened. Agreement on a European Pillar of Social Rights at the EU's Gothenburg summit in 2017 saw a return to recognition of the role of social policy in European integration. It established a set of social rights European citizens should feel entitled to enjoy and committed the union to assisting member states to realise them.

This must be followed by strong substantive action if these are to be anything but empty words, but it at least marked an abandonment of the earlier rejection of the social-Europe concept. In June 2019 the European Council committed itself to A New Strategic Agenda for the EU 2019-24, among the four key priorities of which was building a 'climate-neutral, green, fair and social Europe'. Not only does this complete the rehabilitation of social Europe; it coupled it with environmental policies – a fundamental necessity.

One of the few positive consequences of the Covid-19 disaster has been to advance this change still further. There is widespread agreement that the original tight monetary-policy rules of the European Central Bank would be a disaster if followed now that the economies of Europe and much of the rest of the world have been devastated. There are plans for extremely high levels of public debt as well as vast state support to restore even the strongest economies to health. True, this will impose large debts on future generations, but unless we take these actions now the future itself will be bleak.

Outside the immediate field of social policy there have been more substantive moves to limit speculative activities by banks. But the reforms are not going far enough: banking lobbies are still too powerful among EU decision-makers. A major task for social-democratic parties and their progressive allies is to take far further a programme of reforming capitalism through regulations which protect the environment and climate, as well as consumers, workers and the general public, from the negative consequences of capitalist activity. Much of what needs to be done requires action at European level, because individual countries face the problem of losing foreign investment if they encroach on business freedom.

The task will not be easy. Despite some recent signs that EU policy-makers have learned some of the lessons of the inadequacy of neoliberalism, the commission has very recently adopted the principle of 'one in, one out': for every new regulation adopted, another must be cancelled. Without establishing a hierarchy of regulatory priorities, this is absurd. An intelligent implementation of this principle requires an initial appraisal of existing regulations following two rules: which regulations serve a real practical purpose and which correspond to important social needs? Regulations passing these tests should not be vulnerable to such a crude calculus.

If neoliberal capitalism is to be challenged on the ground that it is rooted in selfishness rather than co-operation, we must first deal with the central contention of economic theory that the market requires individual pursuit of selfish ends to serve the public good. Classical economic theorists, unlike some of their modern political advocates, did not deny the existence of a public good. Rather, they argued, if capitalists have to seek their goals by producing and selling within markets where there is more or less perfect competition, they will have to do so in a way that satisfies consumers' preferences. In practice, many markets are not perfect; as soon as they depart far from that standard, producers can begin to achieve their goals in part at the expense of, rather than through meeting, consumers' interests. Further, by no means all human goals can be achieved through the market and the market can damage pursuit of these other goals if they are not protected from it.

Economic theory tries to recognise these deficiencies by accepting in principle four grounds for public intervention in markets. Two – combating imperfect competition and tackling inadequate information for customers – are designed to protect the competitive economy itself. Two others recognise that the market cannot meet all human needs: public and collective goods (such as health and education) and negative externalities. These last exist where certain by-products of a commercial activity cannot be captured within its market transactions. The menace of the human contribution to climate change has massively increased their importance. The pandemic has done something similar in making us all aware of the need to provide well in advance for potential health crises. The free market will by itself not justify major spending on personal protective equipment, expensive therapies and machinery, and testing equipment for crises that might never happen – spending therefore that might never result in a return of profit to shareholders. The areas that had most difficulty in coping with the virus were often those where provision was in the hands of private firms: care homes in Sweden and the UK; health services in general in Lombardy and much of the US.

There is a strong case for adding a fifth reason for public intervention in market forces – reducing inequality. Economists have traditionally viewed inequality positively as evidence of rewards to entrepreneurship. International economic organisations – principally the International Monetary Fund and the Organisation for Economic Co-operation and Development – have however warned that the recent growth of inequality in the US has begun to have negative economic effects. If the rich take a large share of the growth in national income, the rest of the population, and especially the bottom 40 per cent, can share in the growing expenditure on which the economy depends only by borrowing.⁴

Heavy borrowing for consumption by lower-income people was a major cause of the 2007-08 financial crisis. Capitalist economies therefore face a choice: they can have only two of the following: high inequality, strong mass consumption, financial stability. For social democrats the answer is clear: it is high inequality that is unsustainable. Forming coalitions with other parties requires their acceptance of this choice.

The pandemic has also both intensified inequalities and elevated a long-dormant widespread concern about them. Low-paid workers have been more severely hit than higher-paid ones, as the latter are more likely to be able to have continued working from home. Workers in manufacturing and people-related services, often on moderate and low incomes, are more likely to have been unable to continue their activities and therefore to have lost income. If they were working, as in care services and rubbish collection, they were more likely to have caught the disease. Low-paid workers, especially immigrants and members of ethnic minorities, were more likely to have died from it. Further, the role of many services workers in keeping life going during the lockdowns has drawn attention to the arbitrary nature of the way in which the market rewards different kinds of work. Nurses, other care workers, refuse collectors, bus and delivery drivers earn a tiny fraction of the incomes of bankers and other senior business executives; but whose labour did we most need during the lockdowns? Neoliberalism taught us that the only measure of a person's value is what (s)he can earn in the market. For many people this now seems just wrong. For as long as that sentiment lasts – and it may not be for very long – large numbers of voters will be willing to accept higher taxation, partly to redistribute income; partly to provide better rewards for the many public-service workers involved in those key activities and partly to provide a high base of free or subsidised public services that enable people to enjoy a good even if their incomes are low.

These themes provide the basis for a broad consensus on policies to reclaim the pursuit of social Europe. We must now examine their application in more detail.