The Diverging Economics of European Populism

The relative calm on Europe’s financial markets contrasts with the worsening economic and political stalemate. For the time being, financial markets seem to be driven much more by monetary policy on both sides of the Atlantic and the short-term growth outlook than by the underlying political and economic threats facing the EU. After the episodes of market panic that have characterised the euro crisis, the current phase of complacency might have some advantages. Behind the rather benign assessment of the situation lies the belief that the European establishment has, to some extent, the ability to counter the populist tide sweeping across the continent or, at least, to stick together. Nonetheless, a dynamic of political and ideological divergence along national lines, which predates the electoral rise of populist parties, is gaining traction within the European establishment itself. Populism, far from being a uniform anti-EU movement, thus aggravates a pre-existing logic that leaves the EU unarmed against its own flaws. This situation threatens both the euro zone’s process of rebalancing and the path towards a “soft Brexit.” Populism in a fragmented Europe will have a different kind of economic impact than Donald Trump’s election in the United States.

Long-term sovereign yields have spiked across Europe, notably in core countries, for reasons which, although diverse, do not reflect this underlying situation. European markets mostly seem to be driven less by a fundamental assessment than by the ECB’s signalling of a gradual normalisation (owing to a mixture of economic and political considerations) and rates dynamics in the United States. Donald Trump’s victory has reinforced expectations of a growth-friendly agenda and subsequently enabled the Fed to embark on a more credible path of rate hikes, the anticipation of which has lifted long-term interest rates in the US and abroad. Similarly, European stocks tend to follow Wall Street’s rally (the sustainability of which could be questioned), in a more moderate fashion though. Meanwhile, a series of major events ranging from the Brexit vote to Italy’s referendum amid a severe banking crisis or a new showdown over Greece’s bailout keep fuelling fundamental speculations about the EU’s fate but have fallen short of triggering a full-blown financial crisis so far.

There would be no point, at first glance, in lamenting market complacency. In 2011 and 2012, market trepidation about the euro zone’s debt crisis had debilitating political effects. The bureaucratic imposition of self-defeating austerity measures has infamously delayed any genuine recovery or deleveraging in the hardest-hit countries. The euro zone’s ability to preserve its integrity, thanks to an improvised institutional response centred on the ECB’s rhetoric and, later, on the euro’s devaluation by means of massive asset purchases, has subsequently altered the perception on the trading floor of the way EU politics operates. The euro’s preservation is an existential issue, indeed, not only for EU institutions but also for most national establishments, which have spent the past three decades focusing on monetary unification. This alone underpins the commitment to avoid a break-up in times of crisis. It does not however guarantee agreement among nineteen national governments, with different economic traditions, on the radical kind of mutualisation or macroeconomic coordination that can make a currency union viable long term.

Commentators tend to analyse the rising tide of populism in Europe as a rather homogeneous trend that challenges the EU’s political and economic orthodoxy in a context of economic hardship. The real picture is more complex, since populism follows specific national patterns. Should anti-establishment movements come to power across the EU, this would not translate into a common platform of government, quite the contrary. Looking into specific matters, France’s National Front and the Alternative for Germany, for example, share a common hostility to the euro (in a rather abstract fashion) and to immigration. This should not be considered a far-reaching common platform though. Their broader approaches turn out to be hardly compatible, whether under the single currency or even a looser type of association.

On the economic front, the FN is a statist party that draws on a traditional version of French-style, administrative Keynesianism while the AfD sticks to the economic beliefs (ordoliberal ones, to put it simply) that are entrenched in Germany’s conservative politics, generally speaking, and notably within Angela Merkel’s CDU. The mutualisation of debt and the federalisation of economic policy are even more taboo to German populists than to establishment parties in Berlin. More importantly, contrary to the most common variety, German populism further deters the government from considering a significant investment plan or from encouraging sufficient wage hikes, which would nevertheless be critical to any internal rebalancing of the European economy in terms of competitiveness. The current race to the bottom does the exact contrary.

In the US, Donald Trump’s approach, despite a highly controversial campaign, draws on an economic assessment that can reach beyond anti-establishment rhetoric. His protectionist electoral stance has translated into a more reasonable quest to create manufacturing jobs in the US. This comes at a time when major innovations, notably in the car industry, make this prospect tangible through subtle economic means rather than a self-harming trade war. The dollar’s overvaluation is certainly a threat. This approach — which resonates in the UK with Teresa May’s evocation of an “industrial policy” — nevertheless signals a fundamental shift that eventually redefines political economy from within.

In continental Europe, without even considering precise electoral outcomes, the pressure exercised by populist movements upon national governments aggravates a fundamental situation of divergence and incompatibility. Europe’s various brands of populism share a common anti-establishment stance. In most cases, they also display a wobbly organisation, an entrenched culture of extremism and a lack of institutional credibility. Despite these similarities, they diverge in many respects and unsurprisingly rely on national lines of thought. Reducing anti-establishment politics to a homogeneous trend adds to the current confusion about the EU’s dynamic. Populist movements pose a threat to the EU not so much because of their Eurosceptic stance but because they highlight and deepen the fault lines that separate national political scenes. The single currency in particular makes this situation all the more harmful since no rebalancing can take place in this framework without a complex, perhaps unreachable level of political coordination.