Perspectives

Who’s gonna come and turn the tide?

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Populist and autocratic leaders are finding favour around the world and their strand of politics and economics can no longer be regarded as a fleeting, easily reversible phenomenon.

It wasn’t long ago that many commentators saw the election victories of Emmanuel Macron in France, Angela Merkel in Germany, and Mark Rutte in The Netherlands as a sign that the ‘populist advance’ had come to an end. That turned out to be premature. Now, approximately two years later, five out of the ten largest economies in the world – which jointly account for two-thirds of the global economy – are led by populists or autocrats, namely the US, China, India, Brazil and Italy.

The other five economies all face considerable problems. Wealth per capita in Japan may be exceptionally high, but growth has been low for decades, the country has humongous debts, and its population is ageing at speed. On top of this, many opponents of PM Shinzō Abe fear that he will eventually prioritise his nationalist disposition over Japan’s economic needs.

Germany’s Angela Merkel is on her final lap as chancellor. Her intended successor will not initiate any revolutionary shifts, which is dangerous in itself. Together, the two largest parties – the CDU/CSU and the SPD – are weaker than ever and voters can decide on a whim to go for even more fragmentation, whereas Germany could do with a breath of fresh air. Economic growth is slowing significantly and quite a few economists have warned that politicians have become complacent in recent years instead of addressing the weaknesses of the German economy.

The fifth-largest economy, the UK, appears to have spun out of control as it fights a many-headed dragon called Brexit. British businesses are beginning to feel the pain of the constant uncertainty and many important reforms have fallen by the wayside as politicians and civil servants continue to be steamrollered by Brexit. Theresa May’s Tories are deeply divided. The opposition party, Labour, is also at odds with itself; its leader, Jeremy Corbyn, with his left-wing populist ideas and support from the grassroots Momentum movement, is the business sector’s worst nightmare. Meanwhile, relations between countries within the UK are deteriorating and 90% of the UK population thinks that Brexit is being handled in a way that humiliates the country. The protracted and sometimes farcical divorce drama does nothing for the UK’s reputation or for Europe’s political clout.

In France President Emmanuel Macron is trying to improve Europe’s impact but his attempts to profile himself as leader are patchy at best and the Yellow Vest protests, which have been ongoing for months, have undermined his position.

Then there is Canada, where PM Justin Trudeau has been the favourite of social-democrats with a liberal mindset for years. Particularly following Trump’s election, many wanted to see him as the leader of the free western world but now he is being vehemently criticised in connection with a scandal that creates the impression that the PM was trying to get his Minister of Justice to stop an investigation into the corrupt practices of a large Canadian company.

New norm

To sum up then, one half of the world’s largest economies is led by populists or autocrats while the political mainstream leaders are under attack. When it comes to Europe, despite major problems and dissatisfaction among many voters, so far Italy remains the only one of Europe’s largest economies that is governed by populist parties. While Lega Nord (Lega) and the Five Star Movement (M5S) are both part of the ruling coalition, Lega has gained strength whereas M5S has lost ground. That appears to be a negative development for the Eurozone and the EU as Lega is more inclined than M5S to take a stand against the EU and immigrants. It also has no qualms about collaborating with Russian leader Vladimir Putin’s party.

The political shifts in Europe have been triggered by a combination of factors: immigration, globalisation, neoliberalism and European integration. These developments have fostered a sense of uncertainty as the contrasts within countries increased. The jobs-for-life and the reassuring familiarity of one’s own village, church and largely homogenous country are mostly long gone. Simultaneously, technological developments and increased individualism have meant that political movements and parties cater more and more to the wishes and preferences of very specific groups. The upshot has been polarised societies and political polarisation.

These developments have had an impact not just on the political landscapes of the major European economies but also on smaller member states. We have even seen a tendency towards authoritarian leadership in a number of Central and Eastern European countries in recent years, leading to a decline of the EU’s democratic values from the inside. It is therefore a big mistake to think national populism is some fleeting or isolated phenomena; it has also found favour in Italy, Austria, The Netherlands, Hungary, Poland, Denmark, Sweden and other countries too.

Matthew Goodwin and Roger Eatwell, authors of National Populism: The Revolt Against Liberal Democracy, think that four factors are determining the success of the populists: an aversion to the administrative elite and the democratic institutions; fears that the ‘domestic’ culture will be undermined and destroyed; a sense of getting less than others in the context of a crumbling welfare state, growing inequality, unfair burden-sharing; and a widening gap between voters and the traditional parties.

The Dutch columnist Arie Elshout nicely and succinctly summed up what this entails: “If change is experienced as alienation, everything will shift to the right. It may be wise to see all of the brouhaha as a democratic correction. It is impossible to return to the (idealised) past. However, some things are feasible such as better control, better regulation, and more constraints when it comes to globalisation and immigration in order to prevent calamity. Change needs to be channelled.”

Suffice to say, the channelling is not going too well. And the aforementioned factors, which contribute to the success of the populists, are unlikely to change enough for the prevailing political trends to reverse. Mainstream politicians are trying to remove whatever fuels populism but they tend to go into shock if populists are successful before expounding that the populist politician in question is a danger to democracy. Or, they opt for populism-light policies, which carry the risk that voters will start to disregard them as a watered-down version of ‘the real thing’. At the same time, such surrogates can undercut essential components of the democratic constitutional state. Voters may also view the capitulation of the mainstream politicians as a legitimisation of ‘hardcore populism’.

Zero-sum game

Yet, nationalist populism does not need to have a negative impact on the financial markets in the first instance. Look at how the S&P 500 has performed under Trump and something similar applied to the Bovespa Index in Brazil, following Bolsonaro’s election victory. The man’s democratic credentials may be woeful but investors gleefully anticipated privatisation and deregulation. As a result, the Brazilian stock exchange became one of the world’s best performing stock indices.

It very much remains to be seen whether investors will respond in a similar way in Europe – if populism continues to march on – as they did in Brazil and the US. The reason is that European countries are too small to take a hard line against great powers such as America and China. Whereas collaboration is imperative, nationalist populists take a stand against European integration. If Europe weakens further, Beijing and Moscow will be more than happy to reap the benefits. They are already playing countries against each other. And while economic relations are often not a zero-sum game, the interface between (geo)politics and economics can certainly be such a game.

The upcoming elections for the European Parliament (EP) will likely provide the financial markets with additional reasons to doubt the prospects for the European economy. Polls suggest that although the centre-right European People’s Party (EPP) and the centre-left Socialists and Democrats (S&D) will remain the biggest parties, for the first time they will not be able to gain a majority together.

The Europe of Nations and Freedom (ENF) may well turn out to be the largest winner of the elections. Next, together with other Eurosceptic groups, ENF will be able to frustrate the performance of the EU, particularly as the role of the EP in the legislative process has gradually expanded from an advisory capacity to joint decision making with the Council of the European Union. For instance, the EP has contributed to the formation of the European Banking Union by adopting legislation and regulatory provisions for the single supervisory mechanism and capital requirements for the banks, among others.

However, the buttressing of the Eurozone has been interrupted for quite some time. Kick-starting it again will be significantly harder if the populists are successful at the European elections and start to stymie the process of decision-making. Therefore, it seems unwise to assume that Europe will be able to follow in the footsteps of the US and Brazil in the sense that populist success will translate into strongly performing stock markets.

Also – in marked contrast with Trump and Bolsonaro – some of the populists who have been successful in Europe combine a right-wing social-cultural stance with a left-wing social-economic course. Many voters may think that Europe is creaking and/or they feel that the continent is heading in the wrong direction. Yet, politicians such as Italy’s Matteo Salvini and Netherlands’ Thierry Baudet will most likely be unable to usher in the desired turnaround. The change they bring – if any – will probably not imbue the European economy and markets with new life.

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