For better or worse, we are living in exciting times. Globalisation and rapid technological change are creating huge opportunities. However, the gains are not evenly distributed. The major winners are (i) the hundreds of million people in formerly closed and backwards economies who have been lifted out of extreme poverty in the last two decades on an unprecedented scale and (ii) those in the advanced world who drive innovation, have the required skills or at least the flexibility to adjust to the new global division of labour. Those who see themselves as losers of change are concentrated in the advanced world among those lacking the opportunity, skills or flexibility to adjust. Their plight is often made worse by regulations and by education and welfare systems that hinder rather than promote the required flexibility.

As usual in history, rapid change and significant immigration generate a political backlash among those who see themselves as the losers of change. Across much of the Western world, this backlash has been exacerbated by the legacy of the post-Lehman mega-recession. The crisis itself was caused by a twin policy mistake – inflating a big credit bubble until 2007 and then letting it burst in a way that triggered the worst recession in most developed countries in almost 80 years. Sadly, the surge in public debt in the wake of this mega-recession by 41 percentage points of GDP in the US, 46ppts in the UK and 26ppts in the Eurozone from 2007 to 2015 has left hardly any room for governments to compensate the actual or perceived losers of globalisation. The financial crisis and the extraordinary measures needed to contain it have also fed a pervasive “anti-establishment” sentiment.

As a result, disenchanted voters have been drawn to populists from the ultra-right and ultra-left of the political spectrum on both sides of the Atlantic. Short on arguments but long on rhetoric, the populists have skilfully harnessed stratified social media in which mainstream views are often drowned out in favour of circles whose members re-inforce each other’s views. The radicals from the left and the right have their differences. But as they rebel against the perceived indignities of globalisation, they largely agree on one point: they reject the open societies and the free economic exchanges that underpin the prosperity of advanced countries and offer the emerging economies the only feasible path to catch up with the free societies of the Western world.

The populist backlash against liberal and open societies poses the most serious long-term risk to my modestly positive economic and financial outlook. My base case remains that the radical right- and left-wing populists will not prevail in the end. Instead, I expect them to peak before they can do much more than the kind of limited damage they are causing already. In this note, I explain why. Of course, the risk that things could go wrong instead is not trivial.

The surge in populist sentiment is similar in the US (Donald Trump, Bernie Sanders) and Europe (Marine Le Pen, Beppe Grillo, Jeremy Corbyn). It can be found inside the Eurozone (Geert Wilders in the Netherlands, Austria’s FPÖ) and outside (Sweden Democrats). In the US, many right-wingers rail against the “beltway insiders” of Washington, DC. In the same vein, their counterparts in Europe protest against an imaginary EU ”superstate” run from Brussels or Frankfurt.

That the rise in right- and left-wing populism is a problem for much of the economically advanced world leads to one major conclusion. As the European institutions are not the major problem, there is no magic “reform” of the EU or the Eurozone which could thwart the populist threat. Of course, some reforms would be useful, in the US as well as in the EU and the UK. But don’t expect any such reform to suffice to stop the tide of populist anger.

In one respect, Europe differs from the US, though. In Europe, the same kind of populism could do much more damage than in the US. As clubs of sovereign nations, the EU and the Eurozone are easier to break than a nation state. A president Trump would still reside in the White House in Washington, DC. Even if he were to start some trade wars, the US would remain a large common market. But if populists win decisive votes in Europe, the EU and its common markets may fracture badly, destroying the wealth-generating machine of free commerce in Europe.

Once the post-Lehman crisis had erupted in late 2008, policy makers have – to their great credit – by and large avoided the twin mistakes that had turned the crisis of 1929/1930 into a devastating depression. Instead of letting the money supply contract, they switched to ultra-loose monetary policies, with only the European Central Bank trailing behind until it finally started to act as the chief guardian against financial turmoil with its “whatever it takes” OMT announcement in the summer of 2012. So far, policy makers have also avoided any serious rise in protectionism.

However, the rise of political populism has already caused some damage:
• It has constrained the political leeway to pursue pro-growth policies in parts of the Western world.
• The heightened risk that populist may come to power or heavily influence actual policy even if they do not win elections outright could be one of the various reasons why businesses are more hesitant to invest than before. In a vicious circle, any resulting decline in trend growth could then feed the resentment of those who see themselves as the losers of globalisation while constraining the ability of governments to soften the harsh edges of globalisation through additional government spending. So far, this is probably only a modest factor in much of the Western world. But in some countries such as Italy, the political risks may be starting to weigh more significantly on investment and overall growth.
• In Greece, the rise of radical left Syriza to power at the start of 2015 aborted the country’s 2014 upswing. Instead of a staying the course for a Spain-style rebound from its financial crisis, Greece has been pushed back into a deep crisis as a result.
• With promises that were equally outlandish than those of Syriza in early 2015, British populists won the June 2016 referendum to leave the EU.

The Western world remains far away from the dark ages of the 1930s with its rampant economic and political nationalism. But as the Brexit vote in the UK and some pronouncements of US presidential candidate Trump have shown this year, the echoes of the dark ages are now a little less faint than they were before.

First the good news: we are fairly optimistic that, in the current election cycle, the Brexit vote will remain the only major accident. Chances are that Donald Trump will not move into the White House in January 2017, that Marine Le Pen will not win the Élysée Palace next May and that the German AfD will remain miles away from power in the German election in September 2017. Despite some tail risks, the mainstream centre-right and centre-left forces that by and large back liberal open societies look set to prevail again in the key upcoming elections.

But is that the end of the story? Like other students of human behaviour, economists are prone to extrapolate recent trends into the future. If we extend the advance of populists over the last three years into the future, we would have to conclude that dangerous populists may well win in some places in the next round of key elections in some four to five years. If nothing happens to arrest and reverse the advance of the opponents of open societies and free trade, the Western world including Europe could be in serious trouble eventually.

Trends continue – until they have run their course. Simply projecting recent developments into the future usually doesn’t work for long. I see four major reasons why the more dangerous kinds of populism will likely peak within the next few years before they can do much more damage.

1) Employment rates are rising across most of the Western world. As labour markets tighten, average and median real wages will likely increase over time. Although perceptions often lag behind reality, a rebound in the share of wages in gross value added could eventually take the edge out of the current debate about income inequalities. In some European countries such as Spain and Italy, the long-term results of recent labour market reforms may add to this.

2) The worst of austerity is over in most advanced economies. Instead, falling unemployment and the gains from a much lower interest burden can create some fiscal scope to improve education and fund other measures to support those hardest hit by the dislocations of globalisation.

3) Even some populists may change, for instance in response to a reality shock. The erstwhile “True Finns” have become less radical after joining the national government as a junior partner. After first inflicting massive damage upon taking power, the bulk of Greece’s radical Syriza is gradually turning into a more mainstream centre-left party. In Italy, the task of governing Rome and some other major cities may well instil a greater sense of realism into parts of the “Five Stars” protest movement.

4) Most importantly, populists cannot deliver on their pompous promises. The havoc which Syriza initially wreaked on Greece in 2015 did not exactly help left-wing populists elsewhere in Europe. In the same vein, the contrast between the loud words of the Brexiteers ahead of the UK referendum on 23 June and their failure to come up with any coherent idea of how to actually go about it does not make it easy for anti-EU populists elsewhere to argue the case for leaving the EU.

In the end, some economic and social progress and a growing realisation that neither the right-wing nor the left-wing populists can deliver on their promises should help to arrest and partially reverse the rise of the populists over time. That is my base case.


  1. Perhaps you underestimate the long term disenfranchisement and economic disadvantage many people in the west have to contend with. The disenfranchisement may be real only in the victim’s perception, but in the USA at least, the poisonous power of money in politics make many people feel disconnected and ignored by the powers that be. This is dangerous, and is a very hard problem to unravel.
    The economic disadvantages are to some extent hidden in the statistics. Fewer factory jobs are made up for by McJobs flipping burgers or other low paying service sector jobs. The security provided in a unionized workforce (however stultifying the impact of union overreach may have been) is replaced by the insecurity of fringe, zero hours or other precarious employment situations. Housing in many places, not least the UK, are if not out or reach of young people, far less available than they were for their parent, and social housing is also far less available.
    This insecurity for people entering the workforce or for whatever reason not able to see opportunities (possibly because they are not present or closed to them) means there will be a persistent large minority, at least, who will support Demagogues from left or right. And the situation is made more dangerous as this demographic can be persuaded that they have nothing to lose.
    You say that “falling unemployment and the gains from a much lower interest burden can create some fiscal scope to improve education and fund other measures to support those hardest hit by the dislocations of globalisation”, yet there is little indication that there is much appetite to pursue such policies either in the UK, where fewer students are attending university as the fees are so high, or in the USA where such policies are viewed with a suspicion that ought to have disappeared with the demise of Senator McCarthy.
    I fail to be persuaded by your rosy prognosis, even tentatively stated.

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