The endgame for Tony Blair is now approaching. Or more precisely, the concept of the Third Way and its embodiment in Blair is facing its biggest test, and Blair has just one shot at getting it right. While the Conservative opposition in Britain remains weak and directionless, Blair is still reasonably safe in his commanding position in the British political arena.

The Third Way has always been nebulous. Even its inventors and guiding lights have never been able to articulate clearly what the Third Way is. It does not stand for anything, as much as it is defined by the things it is not. Coming from the failed Left of the 1970's and 1980's, the fall of communism in the east showed the Third Wayfarers that the old pure form of state socialism was dead. More importantly, they realized that the electorate would not vote for it anymore. But they also chafed at the predominance of the free-market ideology that had come with the defeat of communism. So they know what they did not want to be: neither old-style socialists nor free-marketeers. That is what defines the Third Way. It's a pragmatic blend of both strands, trying to occupy the political middle, but its gut instincts and beating heart are still on the left.

The most successful paragon of the Third Way is Tony Blair, who arguably is also the least socialist of the lot. The French experiment with the Third Way under Jospin was half-hearted at best, and can hardly be counted as part of the movement. Schröder in Germany is closer to the Blairite mould in that he cultivated a business-friendly image and certainly spoke the language of the Third Way much more than Jospin ever did. Over the course of the years, and especially since the last election, it has all fallen apart for Schröder, and he has moved back to a more traditional left-oriented political diet. That leaves Blair as the remaining examplar who still wields power.

The endgame I have been referring to rests on domestic policy. Having spent much of his term in office trying to convince the British electorate that the economy is safe in his hands, he now is moving on other areas of concern, most notably "public services," a term that encompasses the entire interface between the state of the citizen. Crime, health care and education stand out as areas where the public is highly dissatisfied with the provision of services. If Blair can't fix these problems, he's going to have a tough time getting re-elected, even with a weak opposition.

But the stakes are higher than that, because it is the entire concept of the Third Way that will face its reckoning. Britain under the leadership of Blair (and Gordon Brown as the Chancellor of the Exchequer) has done economically well, at least compared with the rest of Europe. Inflation is low, growth is reasonable and the budget is in balance. Of course, this was mostly due to the fact that they broadly continued the policies of the previous Conservative government.

The gamble Blair and Brown are taking is that they can fix the problems afflicting the public sector by throwing more money at it. The economic stability of the last decades allows them to spend more money without running up too big a deficit, and then to use that money in order to fix failing schools, soaring crime and abysmal health provision. The key point here is that they have just one shot at it. Right now, the British electorate seems willing to pay slightly higher taxes and tolerate a larger budget deficit in order to fund these improvements. This is culmination of Third Way ideology, such as it is. But people still don't like paying taxes, and if things don't improve relatively quickly, then the notion of higher spending to fix these problems will have been discredited.

The situation is already precarious. Although the British economy has done reasonably well, it's not doing as well as Gordon Brown had forecast. The large increases in public spending he has promised mean that the budget deficit is going to have to rise very substantially over the next years. Because the starting point is favorable, he can afford to do this. Once. And then the room for maneuver has run out. We are at this point now. More money than has been promised is unlikely to be forthcoming, so the billions of pounds in the pipeline for the next years will have to do the trick of improving the quality of delivered services. If they don't, Blair's project of New Labour is at an end. More importantly, it will sink the notion that the state can provide for these services efficiently. So for those who believe that the state has a major role to play in the provision of education and health care, the next years are crucial.

Despite all the Thatcherite reforms, the public sector in Britain remains a horrible throwback to the heyday of West-European socialism after the second world war. The National Health Service promises to deliver health care for free to anyone who needs it, for instance. Since none of the patients pays for care directly, there are no signals about supply and demand in the system. In fact, demand is artificially inflated because there is no perceived cost. Unless the structure of the services is fixed, no amount of additional money is going to solve the problems. The health system needs to change to a consumer-driven organization, and without direct financial involvement from the patients (i.e. paying in some way for what they consume) the essential feedback loop that makes commercial enterprises work will remain absent. In the current structure, the extra money may make a marginal difference, but most of it will be misallocated. The misallocation comes not so much from indifference or incompetence (although both exist), but simply from the fact there can be no efficient capital-allocation system without a price mechanism. The hallowed concept of Free Health Care will have to be abandoned. But Blair and Brown are not willing to take that step, because it is the last vestige of their socialist origins (and they're stronger in Brown than in Blair). To abandon that would mark their complete transition from "left" to "right." The latest Canadian reform efforts completely dodge the issue, showing how hard it is to break free from the past.

So Blair and Brown are embarked on their biggest mission yet, and they can't take the crucial step of introducing actual market mechanisms into the provision of what are now public services. Pumping more money into the current structures is like trying to make ship go faster by putting a bigger engine in it. But if it's already traveling at hull speed, more power from the engine will have a neglible impact on making the ship go faster. You need a new hull for that. And the steamship Third Way looks like it's going to run aground, and the Captain has just made the last course correction available to him.