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15 Jul 201922:00

2018, the year populism threatened to put economic growth at risk

The peak of populist movements, with protectionism as a rising trend, threatened to stop both the global commerce and the economy. According to experts, the worst background would be stagflation (inflation but with economic stagnation) or, in the words of IMF chief economist, a “poorer and more dangerous” world. 

18 Dec 2018 — 09:57
Iria P. Gestal
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2018, the year populism threatened to put global economy at stake

 

 

“So, you are of the opinion that a dictatorship would no longer be possible in Germany today?” -asks the professor-; “no way, we have gone through that”. That’s how The Wave starts, a film in which a group of students recreate, almost without realising, an authoritarian state in 2008 Germany.

 

The world, same as the pupils in The Wave, have seen in 2018, exactly ten years later, how the historic achievements that were taken for granted have started to stagger. Sentences like “that could not happen here” were mentioned in groups of friends, in bars and in journals all around the world as the other wave, the populism one, was spreading from America all the way through Europe. If 2017 was a year of warning, 2018 has been of consolidation of this new wave that is starting to spread around economy too. 

 

Donald Trump celebrated in January his first whole year in the White House without any major upheavals. The campaign’s great promises, such as the wall in Mexico or trade restrictions, had not taken place, Dow Jones was scoring records almost daily and unemployment was decreasing. After a 2017 of distresses, the world seemed to take a deep breath.

 

 

 

 

But on March, 22 History took a turn in the shape of a memorandum. That day, Trump signed a formal order in which he commanded the United States Trade Representative to apply tariff rates valued in 50 billion dollars to Chinese products’ imports. It was the starting gunshot for trade battle, the ultimate step to start a reversion of almost one century of globalisation.

 

China answered with tariff rates enforced to 128 products from the United States, including planes, cars, fruit, and certain steel items. The escalation of threats continued to go upwards all through the year, with Washington and Beijing adding more and more articles to the categories affected by the rise. In parallel, Trump opened yet a new battlefront after threatening to put tariff rates of 25% on European steel and 10% on aluminum to protect the United States industry.

 

Jean-Claude Juncker, president of the European Commission, answered saying that the European Union “will now impose tariffs on motorcycles, Harley Davidson, on blue jeans, Levis, on Bourbon” if the promise of Trump was carried out. In July, Brussels and Washington proposed a truce, but the threats have kept going. 

 

 

 

 

From Washington to Rome

Populism has burst in a context in which everything seemed to be just fine in the West: seventy years after the end of World War II, after the end of Hitler and Mussolini, and the creation of Gatt (prelude of the World Trade Organisation) and with economy recovered after the last crisis. Globalisation, social conquests, democracy and the economy of countries like the United States seemed to be in good shape.

 

However, inequality, the perception that the distribution of globalisation has not been equitable and that the opening of the world has put in danger national values and economy have disappointed the population, seducing them with speeches of “them against us” and “the people against the elites” that are usually used by populism.

“Historically, the unification of national markets has required an unequivocal political project directed by a strong central executive”, explains economist Dani Rodrik in his research Populism and the economics of globalisation. “Nothing comparable exists globally, and the European experience gives reasons to be sceptical of the fact that something similar could even happen at a regional scale -continues-; “in a world divided politically, markets are at the same time facing powerful centrifuge forces”.

 

 

 

 

In 2017, the Make America Great Again and the America First that exalted Trump reached Europe in the shape of the National Front in France and the Brexit in the United Kingdom, made ultra-rightists reach powerful positions in Germany and sneaked into the German Bundestag.

 

In 2018, the wave has kept spreading, reaching other European powers. Barely a month after the coalition of Angela Merkel’s UCD with German socio-democrats gave Europe a break, regaining the trust in the communitarian project after the irruption of anti-European forces in Germany and France, the Italian elections ended up consecrating the rise of populism in the continent. The 5 Star movement and the North League won, breaking the political order that had prevailed in the country ever since the end of World War II.

 

Both forces, Euro-sceptic, ended up partnering up to create a Government with Giuseppe Conti at the lead, although it has been Matteo Salvini, Deputy Prime Minister and Minister of Interior, who has publicly led the conquest of the country’s populism.

 

 

 

 

In Latin America, on the other hand, experts are already noticing the shift from left-wing populisms (personified by Kristina Kirchner in Argentina, Evo Morales in Bolivia or Hugo Chávez in Venezuela) towards right-wing and ultra-right ones, a trend that started to be made clear last October after the election of Brazilian president Jair Bolsonaro, from the Socio-Liberal Party. Same as Trump, Le Pen o Salvini, Bolsonaro made of xenophobia and the rejection to plurality its weapons during the campaign. His slogan was “Brazil above everything and God above everyone”.

 

All these moves, until now local ones, could solidify into a supranational move thanks to Steve Bannon, former strategists at the White House during the first seven months of Trump’s tenure, who has proposed to gather all European rightist populists under the umbrella of what he calls The Movement.

 

The goal is to become a think tank with which spread the wings of tough European rightist policies, specially in base to next year’s elections at the European Parliament, which will be a litmus test for this kind of trends.

 

 

 

 

Declared admirer of Salvini and close to Le Pen and Nigel Farage, former leader of the British anti-European party Ukip, Bannon has approached the Spanish ultra-right as adviser for Vox. During the last year, the executive has also advised Hungary’s Fidesz, Alternative for Germany, the Democrats of Sweden and the Party for Freedom of the Netherlands, the North League in Italy, Austria’s Party of Freedom and the Popular Party of Switzerland.

The Movement aspires to be sort of an Internationale of alt-right, taking Momentum as its model, the British political organisation that reactivated the left-wing in the country, with Jeremy Corbyn at its head. According to Bannon, his goal is to become the antithesis of Open Society, the foundation of the magnate George Soros

 

Towards a new crisis?

The International Monetary Fund (IMF) and the World Tarde Organisation (WTO) have already started to warn about the impact of populism on the global economy, specially referring to trade restrictions. The same has happened in the last G-20 meetings, where countries like Germany and France have insisted on populism being one of the greatest threats to growth.

 

According to the British manager of fund Schroders, the peak of this movements will consequently entail a more fragmented world with higher inflation tendencies. The company explains that if populism derives into a reversion of globalisation, the global commerce would shrink and the growth of economy would weaken.

 

“Industries would retreat to domestic markets; the productivity, which has profited from opening to competitivity, would slow down even further; and companies would face severe challenges to attract talent and sourcing”, claims Schroders.

 

 

 

 

“In general -continues-; we would be considering an environment with a higher degree of stagflation (increase of prices and unemployment, and economic stagnation), where the bond yields are higher and the markets with variable income list with low valuations”.

In its last prelude to an annual report as chief economist of the IMF, Maurice Obstfeld explains the following: “without any more inclusive policies, multilateralism cannot survive, and without multilateralism the world will be a poorer and more dangerous place”.

 

Beyond hypothetical stages, the peak of populism has coincided with a deceleration of economy. The first symptom is the deceleration of commerce, which for the last decades has been the main driver of the global economy. In its last predictions’ report, published in October, the IMF reduced its predictions of growth for commerce, standing it at 4.2% for 2018, and 4% for 2019 (0.6 points and 0.5 points below previous estimations, respectively).

 

 

 

 

This deceleration will directly impact the economic growth, which will also be affected by the normalisation of currency policies from the main Central Banks after the stimulus of the crisis. In September, the Organisation for Cooperation and Development of Economy (OCDE) claimed that “the global growth has reached its highest point”, alluding to factors like trade war among its main concerns.

 

The organism anticipates a growth of 3.5% for 2019, below the estimated 3.7% for 2018. The IMF has also reduced its expectations of growth. In its last report, published in October, the organism anticipates a rise of 3.7% for 2018 and 2019, which means a reduction of 0.2 points in base to prior predictions.

 

The entity underlined that the impact of trade policies and uncertainty are becoming evident on a macroeconomic level, whilst they accumulate “anecdotic signs” of the impact that they can have on companies. “Trade policies are a mirror of what happens in policy altogether, and the latter keeps being unstable in several countries, which represents additional risks”, said Obstfeld in the presentation of the fund’s last perspectives for the future.

 

 

 

 

 

“To evaluate the seriousness of the threats of growth, we must ask what would governments say if the risks materialised and a general recession took place: the answer is not reassuring”, he sentenced.

 

The two biggest global powers, the United States and China, will also decelerate as a consequence of the trade war. The IMF kept its prediction of 2.9% for the United States and 6.6% for China in 2018, although it anticipates a reduction of 2.5% and 6.2% respectively for 2019.

 

The European Central Bank, for its part, estimates a rise of 2% for the Eurozone in 2018, of 1.8% for 2019 and of 1.7% for 2020. Mario Draghi, president of the entity, warned about the uncertainty that derives from protectionism, the weakness of developing countries and the volatility of financial markets to moderate their predictions in a tenth for 2018 and 2019.

 

 

 

 

According to a predictive model elaborated JP Morgan, the next global crisis will take place soon. The investment bank foresees a recession for 2020, although less acute than the previous one. The entity estimates, for instance, a drop of 20% of the stock market index of the United States and of even 48% of developing countries. Some macroeconomic indicators start to alert about a new global crisis too.

 

The yield of the United States bond, used by economists as an analogy of the global markets, started to be made plain in 2017. That means that the breach between bond profitability to two years and to ten has tightened. This process is usually associated to a change in the expectations of investors and has taken place before each of the seven recessions.

 

However, despite the warnings of economic elites and the many “that cannot happen here”, the wave of populism keeps on spreading. Although it is not comparable to the populist movements of Trump or Le Pen, the many thousand yellow jackets that have gone to the streets in France defending the same speech of “the people against the elites”.

 

 

 

 

A movement with no leader nor ideology has implanted against Macron, a politician formed in the National School of Administration, out of where all the great leaders of the country have come, and which for many people entails the home for French elites. Although the germ for the ginet jaunes was the rise of oil prices (a measure which Macron has had to take out, postponing the rise), the move has ultimately been joined by new collectives and vindications, like the reduction of purchasing power, tax policies or measures of social distribution.

 

In Spain, the only European power that had escaped the advancement of ultra-right policies to the point of being referred to as “the great exception”, has now encountered the same issue: rightist populism came hand in hand with Vox, a party until then marginal, but which obtained twelve seats in the Parliamentarian elections of Andalusia, the most populated region in the country.

 

The ultra-right, xenophobic, anti-European formation profited from the same pulses as Donald Trump in the Untied States or Brexit in the United Kingdom but added to a particular national context which was characterised by a year of political turbulence in Catalonia and an environment of disaffection regarding politicians due to the many cases of corruption.

As in The Wave, everything that had been achieved seemed to have reverted right when the world was about to claim victory, and the crisis that is coming close could even spread more of these movements. Today, the world is writing the next pages of its history, and defining whether they will be more prosperous or, as Obstfeld said, poorer and more dangerous, is not at stake. 

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