Petar Ganev | Institute For Market Economics | Gold Newspaper No. 6 | 2017
Nationalism, though forgotten till recently, is not unprecedented in Europe. Its appearance, however, is traditionally linked with harsh economic adversity — in the sense of severe shortages, such as which the Western world has not encountered since the Second World War. Europe today, as defined by Financial Times, is fundamentally peaceful and prosperous. The broad mass of the population, which predetermines the continent’s political movements, is not dying of starvation. Nevertheless, the “renaissance” of nationalism and economic populism is an incontrovertible fact.
The migrant wave is far from being the only explanation. On the contrary, the Great Recession of 2008 – 2009 and the following European debt crisis gave some the feeling that the contemporary European project was falling apart — a project, which slowly shifted from the single-market model to one of redistribution. The unified European currency lent support to the ensuing fiscal expansion and gradually concentrated power into the hands of technocrats (a.k.a., the European Troika), rather than into the various individual democracies, which are currently suffering from over-indebtedness. The Greek “NO” expressed exactly that — a clear rejection of the redistribution model, voiced by the broad mass of the population.
The rise of buck-the-system political players carries immense risks, however. This mixture of nationalism and clearly defined economic populism is dangerous to both the fiscal stability and the integrity of the Eurozone in its current state. Experience shows that nationalists and populists do not reconcile well with the term “independent central bank,” much less a supranational one, and are inclined to reduce any monetary regime to its foundations. The latter is especially true when the central bank must impose upon them an unpopular policy — such as establishing capital controls, as is in Greece’s case.
Several important elections are coming up in 2017, starting with the presidential elections in France and then the federal elections in Germany, which could change the European status quo. Whatever the outcome, the rise of populists and nationalists is now a fact, and there are no signs of its reversal in the foreseeable future. The effects on Old World economies are likely to be less than rosy.
During the summer of 2015, Greece held a historic referendum, to which the Greeks answered with a resounding “NO” to the Troika’s conditions. Their goal of rejecting the deal with Europe was set in vain — the austerity measures continued, and the capital controls are still in effect today, though not perceived as a “slap” in the European elite’s face. All the European bureaucrats and technocrats agreed that the referendum was madness and a “NO” vote suicidal. Nevertheless, the impossible occurred — and did so with ease.
Almost a year later, on June 23, 2016, the UK voted to leave the E.U. Despite preliminary polls showing that the vote was even, the mere idea of leaving was interpreted as “preposterous.” Even after the vote, the dominating opinion was either that there would be a turn of events, or that a “reasonable” deal would be reached, one that would more or less maintain the current state of affairs — that is, regarding participation in the single market. Today, it is clear that Brexit will happen — and very decisively.
On November 8, 2016, we also witnessed Donald Trump’s victory in the U.S. presidential elections. Within a few hours of the results’ being released, even the most respectable publications were giving Hillary Clinton 80-90% odds and had completely discounted Trump. The latter of which was explicitly labeled as unfit for president by all those who, in one way or another, would define themselves as part of the “elite” — intellectuals, politicians, commentators, businessmen, and journalists, along with a plethora of celebrities.
These three examples clearly show how effective populism is today. It works in the sense that the political map has to be drawn around it. Each and every one of these ballot measures can be viewed in a more positive light — i.e., a more reasoned, libertarian approach towards Brexit — but the overwhelming majority of such cases have been disappointing, resulting in a revolt against the elite, a rejection of globalization in its current state, and a fear of migration. Thus, both patriotism and nationalism played a key role in all three votes.
Truth be told, none of these events was coincidental. On the contrary, if we analyze people’s attitudes today, then all three outcomes seem deliberately detrimental to the elite. The combination of two factors — economic populism and anti-immigration tendencies — has laid the ground for the rise of anti-system political players that benefit from the status quo’s deadlock.
Running out of Promises
The rise of nationalism in Europe cannot only be blamed on the migrant crisis. On the contrary, the events in Greece or, for example, in Central Europe (especially in Hungary) have shown that economic difficulties are the core reason for the rejection of status quo. The Economist Intelligence Unit’s assessment makes it clear that the negative effects of the economic crisis have had a disproportionally powerful impact on Europe, especially regarding political views and democratic attitudes. The European model of social promises — that of boundless possibilities and numerous free meals — came crashing down after the Great Recession. The European debt crisis is, in fact, a result of these dwindling empty promises.
Within the annals of Western history, there has never been any period in which the welfare state has been as pumped up as it was on the eve of the European debt crisis. Never before have so many risks to the average citizen been underwritten by public programs. This expansion of the public sector, however, has led to indebtedness and stagnation. It has led even to personal indebtedness, caused by expansionary macro stimuli. When people are drowning in debt and lack hope for the future, bitterness towards the elite and distrust of the economic model inevitably rise.
The events in Europe over the past several years have clearly shown that such feelings are put to very good use by nationalistic parties, which traditionally blame capitalism and are replete with anti-globalization rhetoric. The European, Troika-fashioned rescue mechanisms provide very convenient conditions for such parties to flourish. The developing migrant crisis has only served to further strengthen this trend — the link between the increased pressure of immigration and the increasing support of nationalistic movements in Europe is unambiguous.
Nationalism Buoys Economic Populism
The wave of nationalism in Europe has unavoidably gone hand-in-hand with economic populism. If a parallel is to be drawn between those parties that openly exploit the migrant crisis for political purposes and those that promise the most generous economic gains for their citizens, they almost completely overlap. Neither exploiting fear (of foreign “enemies”) nor making empty promises of prosperity should come as a surprise — authoritarian regimes (those that forsake democratic values) always utilize both tools.
In Europe, both of those issues have another crossing point, as well. A frequent motif among many nationalists is that minorities — and especially immigrants — are abusing the welfare systems of the Continent. The Swedish and Danish nationalists, for example, are of the opinion that the welfare state risks extinction, notably due to the inflow of migrants, and therefore want to limit migrants’ access to the local labor market. It is an argument that has much in common with the sentiments behind Brexit and behind Trump’s election. What they all have in common is that the real problems of the welfare state can be ignored and attributed to immigrants.
The paradox is that, even though populists and nationalists use to their advantage the argument that their “free meals” are being depleted, they actually bring even bigger promises to the political stage than do their opponents. Despite all the measures and programs in Europe over the last few years, total governmental debt only began to decline as late as 2015 and is still within 85% (EU-28). Deficits shrunk, but overall, the EU continues to be in the negative — few examples exist of countries with balanced budgets (e.g., Germany and Estonia). In this sense, if the wave of nationalism and populism completely overtakes Europe, it will hit a wall very quickly — similar to the situation in Greece after the referendum — and would place additional pressure on monetary policy.
Populism and Central Bankers
Economic populism is usually viewed mainly as a threat to a country’s fiscal stability. Historically, however, populism has always played around with monetary policy, as well. After the Panic of 1893, for instance, America fell into its greatest depression ever. During the second year of the Depression (1894), the so-called “Coxey’s Army” organized the very first protest march on Washington of any significance — at least from the media’s point of view — and was strongly populist in nature. Protestors demanded massive public spending to provide work for the unemployed and massive amounts of government-printed dollar bills — enough to pay the workers.
It was during those years that the practice of privately minting silver coins gained governmental support — a policy known as “free silver.” The concept is highly inflationary (as opposed to the gold standard) and is supported by populists and so-called “silverites.” By the way, the leading thesis back then was that the exchange rate between gold and silver had to be kept at sixteen to one. Today, the exchange rate is seventy to one. What is important to take away from this case is that the populists bundled their fiscal promises up with absurdist monetary notions, even then.
This story only goes to show that somewhere at the root of all populist movements lie certain clumsy concepts concerning the “democratization of money.” The term refers not to the modern idea of organic block-chain democratization (the market’s alternative), but rather to an attempt to preserve the monopoly over the money supply — their own independence from the central bank violated — a sort of “democratization” of a monopoly. It is precisely the rise in popularity of such ideas that poses the most serious threat to any monetary regime.
Such tendencies are especially interesting in the case of the Eurozone, where the independent central bank is actually supranational — thus, the patriotic revolt against it is simply unavoidable. If the wave of nationalism in Europe gains momentum, then the ECB will be put at great risk, as well as the integrity of the Eurozone itself. It comes as no surprise that within the plans of Marie Le Pen exists a scheme to eliminate the euro, while Beppe Grillo is openly speaking of a referendum to leave the Eurozone.
Marie Le Pen’s plan to destroy the euro is emblematic. The leading motif is, again, patriotic — the return of monetary sovereignty to France. The first point provides for the euro be swapped for a basket of new national currencies — such as the ECU. Of course, France is to be able to deviate from the new basket within 20%. The second point is removing the independence of the central bank of France and discarding any regulations standing in the way of direct government financing. The third point is printing new French francs to fuel government spending and to pay off external debt.
Though taken to an absurd extreme, this program is a classic — all its fiscal ideas become viable only accompanied by a “patriotic” monetary program. Such ideas have always been proclaimed by one populist party or another throughout Europe, but the difference today is that such parties cannot be easily ignored. Recently, even the ECB officially remarked that increased political risk presents a challenge to both fiscal measures and structural reforms, as well as to the debt stability of the Eurozone.
The rise of nationalism has already changed Europe’s political map. It is important for us to realize that the concerns over the current model’s being swapped and anti-immigration sentiments do not depend on the “one percent,” which can tip the scales in any given election. It is unlikely that we will see a large number of nationalistic parties taking power across Europe any time soon, but the increasing support for them will force the status-quo parties to play the anti-immigration and populist tune more and more. Such a turn of events would threaten the financial stability of and particularly the continued unification of the Eurozone. Brexit may not be repeated any time soon, but a referendum over monetary policy does seem likely.
France – Towards the end of April and the beginning of May, two rounds of presidential elections will be held in France. The leader of the National Front, Marie Le Pen, will almost certainly reach the second round, and according to official projections, although not “favored,” her chances of victory are by no means negligible. Currently, these elections can be seen as the most immediate threat to continental Europe’s status quo. Marie Le Pen’s position is no surprise — she opposes globalization, exploits fear over mass immigration and Islamic fundamentalism, and supports Trump and Brexit. And it’s all guaranteed by a weighty economic populism and a plan to scrap the euro — or the so-called return to monetary sovereignty.
Italy – At the beginning of 2014, Matteo Renzi became the youngest Prime Minister in the history of Italy. Renzi undertook several important reforms, but at the end of 2016, “crashed and dove” in his own referendum over constitutional changes and, in the end, resigned. Neither the referendum’s failure nor his resignation led to immediate parliamentary elections, but they are to be held by May, 2018, at the latest. Surveys show that Beppe Grillo’s populist Five Star Movement party is in a position to win the elections. The former comedian’s position is fully in line with European populism — he has proposed a referendum to leave the Eurozone and to return the lira, as well as to follow the UK, eventually, out of the EU.
Germany – On September 24, 2017, federal elections will be held in Germany. Following Trump’ victory in the U.S presidential elections, many publications announced Angela Merkel to be the new leader of the free world — meaning the defender of liberal values. Despite the migration pressure on Germany, Merkel’s chances in the coming elections appear quite high. Fiscal and monetary populism in the most competitive country in Europe do not so easily apply there. External public debt has fallen by 10 percentage points over the last 5 years, while unemployment is at its lowest since Germany’s unification in 1990.