Everywhere, mainstream politicians are losing support to what I like to call the ‘anger vote’. This will have lasting effects on politics and with it the long-term economic outlook. It is reshaping government policies, forcing the mainstream political parties to turn away from globalization towards a new populism based on nationalism, protectionism and more state intervention and immigration control.
This will prove counter-productive. It is likely to dampen any recovery in productivity, pushing already low growth rates even lower. This is bad, long-term, for financial assets.
The years since the global financial crisis have seen a worsening global political and economic environment, leading to increasing political fragmentation; a widening demographic deficit and labour displacement; slowing productivity and rising low-skill, low-pay employment; worsening wealth and income inequality and growing generational and regional disparities; and growing nationalism.
Faced with these challenges, politics has failed to provide an economic dividend for the majority from the post global financial crisis economic recovery. Productivity growth is stuck at low levels. Jobs that are being created are low-skilled and low-wage. That does little to address the anger vote.
Indeed, judged by growth in global trade, advances in globalization stopped dead in 2008. The momentum came to a halt because of failure of the Doha round of trade talks and the advent of a myriad of micro protectionist measures. Obvious next steps in the path of globalization with huge potential, such as liberalization of trade in services, have simply not happened.
Brexit is perhaps the laboratory test of this winter of discontent among economic losers, or those that perceive themselves as being so. The vote was economically irrational but supported by those who felt ignored by elitist politicians and devoid of any benefit from the touted economic recovery and globalization and European Union membership before that. It was crystallized into a vote to leave (by older, white countryside dwellers) as a movement to “take back control”. In the UK’s parliament, a majority of elected politicians are against Brexit. But if Brexit is put to a vote, the vast majority will vote for Brexit. Not to do so would lose them their job at the hands of their constituency selection committee.
Brexit will entail heavy economic losses for the UK economy over time. There will be no EU deal granting the UK both access to the single market and border controls to stop the free movement of labour. It looks like the UK government will prioritize control of its borders. The EU, to contain its own populists, cannot be seen to reward the UK with free trade. That will make Theresa May’s ‘inclusive society’ undeliverable.
The rise of populism is far more dangerous for the European project than the sovereign debt crisis ever was. Popular support for the EU is now below 50% in the biggest countries and only about that level for the EU as a whole. Faced with fragmentation (of which Brexit is the most extreme event so far) Europe has to choose between greater federalist integration (fiscal) or more nationalist policies. The pattern since 2008 is for the nation states (particularly Germany) to grab back more decision-making from the EU institutions, hence the arcane decision-making processes the European Stability Mechanism/European Financial Stability Facility abide by and the flawed implementation of so-called ‘banking union’. It is likely to continue.
We could be saved from this if new technologies suddenly cause a seismic productivity lift-off that is reflected in much higher growth rates and is complementary (rather than substitutive) of labour markets. But while new technologies have the potential to heft productivity and growth, their impact will be gradual.
All this raises the risk of increased geopolitical instability in both EMs and DMs, also because EMs do not do well and have less of a stake in integrating into the world economic system. This gives greater licence to maverick political behaviour.
The anger vote will grow globally.