Populism & European Economic Stability
A populist wave is sweeping across Europe, bringing with it a wellspring of nationalism and nativism. As Alternative für Deutschland (AfD), Geert Wilders, and Marine Le Pen dominate headlines and sometimes polls, it’s critical to consider the implications of Europe’s emergent populist movements for the region’s prospective growth and stability. While some close observers of Europe argue that populism has less broad appeal than its salience would suggest, these ideological inclinations have the potential to radically reshape European politics and growth.
Almost all populist parties share the same rhetoric, arguing that their country would be more prosperous, more familiar, and safer if their nation were to throw off supranational anchors and eject foreigners. According to populist leaders, the blame for perceived unchecked immigration and stifling European integration lies with elites who are unable or unwilling to prioritize the wellbeing of the common people. Beyond broad nationalism, nativism, and anti-elitism, populist parties rarely put forth concrete policy agendas or proposals.
It’s safe to say that European populists are driving greater antipathy toward the European Union. If populist parties dominate elections, they will pursue some form of divorce with the European Union, believing that separation will empower their economies to be more competitive. Three common objectives have emerged: (1) The end to free movement across the European Union; (2) independence from EU monetary policy constraints; and, (3) freedom to enforce protectionist trade policies. If these objectives endure, the consequences of a Fraurevoir or Deutschleave will be deeply destabilizing and will not produce economic windfalls for individual European states.
Anti-immigration is a key driving force behind European populism. The Dutch election, scheduled for March 15, is the first test of the appeal of anti-immigration rhetoric. Dutch nationalist politician Geert Wilders and his party, the Party for Freedom, have consistently espoused a halt to immigration, pledging to “make the Netherlands ours again.” Other European populist politicians like Marine Le Pen of the French far-right party, the National Front (FN), and Frauke Petry of Germany’s analogue, the AfD, share Wilders’ sentiment. Spurred by its apparent appeal, conventional politicians have glommed on as well.
This is worrisome. European countries have long grappled with poor fiscal health and paltry economic growth. Stemming immigration will exacerbate these trends rather than, as European populists assert, ameliorate them. Immigrants to OECD countries greatly strengthen the competiveness of those countries’ workforces and labor markets’ ability to manage asymmetric shocks. Regarding their fiscal impact, immigrants are, at worst, a neutral fiscal burden, and, at best, immigrants contribute significantly to the fiscal health of a country. In Sweden and Luxembourg, immigrants are estimated to grow the fiscal coffers by two percent of GDP. Immigrants are younger and more productive; they sustain social welfare programs in countries with aging populations and foster innovation and economic growth. As European populists stem immigration to their respective countries, they may also expose themselves to volatility and the risk of recession, thereby greatly accelerating the development of fiscal challenges.
Populist leaders are also pursuing ostensibly greater monetary policy freedom. In France, Marine Le Pen has called for a “return to monetary sovereignty.” The FN, Le Pen’s party, argues that resurrecting the franc would allow France to pursue more supportive monetary policy to make its exports more competitive and to revive its languishing manufacturing sector. FN asserts that the redenomination would also extend to French sovereign debt and lessen France’s debt load. These benefits seem to stem from the projection that the new franc will depreciate against the euro because of, according to Financial Times, “unprecedented uncertainty unleashed on the continent.” As other countries consider similar moves, this uncertainty will only intensify, paralyzing markets and policymakers.
For France, certain knock-on effects of redenomination and FN’s plans to strip the Banque de France of its independence and wield it as a tool are predictable. The franc’s depreciation will drive inflation which would ordinarily be contained by the Banque’s monetary policy response. However, under the leadership of the FN and Marine Le Pen, it will be used to finance welfare and industrial development, further driving inflation. Trapped between an imperative to address an inflationary surge and political objectives, the central bank will be paralyzed as politicians squabble and bicker. In turn, “debt incurred by French businesses and households would increase … and eat into savings, the fixed incomes of households, and small pensions,” according to Benoît Cœuré, an executive board member at the European Central Bank. Politicians in France and in other EU nations who are enticed by the prospects of monetary policy independence from the European Union risk producing uncertainty and subjecting their citizens to increased hardship.
The populist embrace of protectionism is the final risk. It threatens the European Union’s economic integration and, in turn, the competitiveness of EU member states and companies. The European Union offers companies access to an integrated market with a common regulatory framework, eliminating the costs of complying with a multitude of separate regulatory regimes. The single market also allows European companies to leverage regional supply chains to drive quality improvements and cost reductions. Finally, access to a large, integrated market incentivizes investments in innovation because companies are assured that their products or services will reach enough consumers to make investments worthwhile, contributing to regional economic growth and promoting Europe’s competitiveness worldwide. It’s no surprise that Werner Hoyer, president of the European Investment Bank, wrote in a recent report, “The integrated market is the backbone of Europe’s prosperity.” A rejection of regional economic integration and, more broadly, international free trade risks it all.
European populists hope to halt immigration, achieve redenomination, and erect barriers to economic integration and free trade. The risks that these objectives carry are considerable. Halting immigration would weaken economic growth and leave countries in a precarious fiscal state. Redenomination and monetary policy “freedom” could drive monetary instability and leave vulnerable households exposed to increased hardship. Trade protectionism will cripple European economies and leave them unable to stand. Elections in the Netherlands, France, and Germany have the potential to either impede or encourage the realization of these risks.