The Strategist

'Popularity of populists' in Europe may drive the world's economy into recession

12/14/2016 - 15:00

Elections and referendums in developed democracies are now not a routine process, but rather a destructive factor. Experts point out that those who are now called "nationalists" and "populists" may lead the key Eurozone countries to collapse of the euro zone or even to a new global recession.

James Cridland
James Cridland
Overthrow of governments in the Arab world has been called Arab Spring. However, very few people in the Western countries are pleased with change of the ruling elites in the old world.

Migration crisis, Brexit and victory of Donald Trump in the US (takes office in January 2017) gave rise to the most pessimistic economic forecasts, and pushed aside economic slowdown and problems of the Chinese economy. Before the US elections, a group of prominent economists released an open letter, saying that implementation of Trump's economic program could lead to disaster.

Recently, Donald Trump was named "the biggest risk for the global economy", according to a client survey conducted by Oxford Economics Analysis Center. More than half of respondents said that likelihood of a sharp economic downturn has significantly increased in the last three months.

"Given extremely growing uncertainty in the political and economic situation, the main risk for the world economy now ... is, of course, the US policy", - reckons Jamie Thompson, Head of Macro Scenarios Department at Oxford Economics. According to him, the research reflects ongoing "changes in the outlook for the global economy."

Not only Trump and Brexit are jeopardizing the situation. Threats to stability are popping up here and there, and some have already started to talk about "European Spring".

"Brexit and the migration crisis are testing limits of the European cooperation, while eastern part of the region has not yet fully adapted to decline in oil prices - said Hans Timmer, World Bank’s Chief Economist for Europe and Central Asia (ECA). - Absence of new sources of growth in the region and disbelief in existing institutions support populism and political polarization."

"Popularity of populists" is accruing for reasons. Even developed countries are slowly losing battle with disparity and impoverishment of the middle class. World Bank’s November report suggests that concerns about changes in economic conditions, and, in particular lack of job security, activates polarization of the political field in the ECA countries.

"We observe rapid growth of temporary and part-time employment, and changes in the labor market’s demand structure under influence of digital technologies. All this exacerbates fears of people in the region, and is accompanied by a shift of the population support from centrist parties to more radical political forces", - World Bank stated in the report. 

Italian Premier Matteo Renzi failed to change the constitution by making the executive powers more mobile when taking important decisions. On December 4, more than 60% of Italians voted against Renzi’s plans. After this, he declared intention to resign, most likely after the country's budget is adopted. Western analysts believe that the failed referendum means triumph for Italian Eurosceptics, which, in turn, can trigger Italian version of Brexit. 

Elections in France, the Netherlands and Germany will be held in the spring and in the autumn of next year. Main contenders for presidency of the Fifth Republic are right-wing Francois Fillon and nationalist Marie Le Pen. Manuel Valls, Socialist and ally of incumbent president Francois Hollande, will counterpose himself to these two.

Far-right Party for Freedom and its leader Geert Wilders are claiming victory in the parliamentary elections in the Netherlands. Probability that Angela Merkel loses election in Germany next year is small, yet opposition party Alternative for Germany still has a good chance to form a powerful faction in parliament.

Forecasts of global growth, the US economy and the EU cannot make allowance for all "black swans" and, therefore, are quite optimistic. For example, the Organization for Economic Cooperation and Development (OECD) raised its forecast for real GDP growth in the euro zone from 1.5 to 1.7% for 2016, and from 1.4 to 1.6% for 2017.

However, can growth of less than 2% be considered a good achievement? The OECD experts say the key problems in the Old World are likely to remain unresolved. In particular, they are concerned about low consumer demand due to high unemployment and weak wage growth, vulnerability of the banking sector, and low rates of investment growth.

Above that, actual stagnation of world trade caused problems with exports in some countries. In this situation, European exporters could take advantage of the falling euro. Analysts surveyed by Bloomberg suggests that the euro and the dollar will reach parity in the next year, yet it is difficult to predict what impact the new balance will have on the global economy.

Of course, alarmist predictions will most probably remain on paper. Extreme right wing is losing, too. For instance, far-right Norbert Hofer recently took a back seat in Austria. Sustainability and inertia of economies in the "golden billion" countries are quite high, and investors are not afraid of "populists".

Donald Trump’s victory in the elections drove US stocks to record highs. The euro, after a brief dip on news from Italy, quickly returned to previous levels.

Let’s not assume, however, that things will work themselves out. The global political and economic system is in a period of profound transformation, and no one knows what will happen next.