The surge right

While the rest of the world relaxed on the weekend, a tremor swept through Europe. It’s a big deal. And scary.

Today the euro fell in value. European equities took a hit. Three-quarters of UK stocks opened amid losses. Continental banks tanked. Bond yields surged. This happened hours after French president Macron called a snap election. And that was in result to populists making big gains in the European Parliament on Sunday.

The French centrist leader is trying to stem the tide of support for rightist oppo leader Marine Le Pen (above), whose party just received double the support. It’s a gamble. Macron may be crushed. French voters – like many of those in Germany, Italy and surrounding states – are throwing support to nationalist, anti-immigrant, protectionist, authoritarian, charismatic leaders. And Mr. Market is worried about it.

What’s going on? Can it happen here?

Populism is the political flavour now. Not from the left, but the far right. In fact these days there’s more populism in the world than at any time since the 1930s. And the risk to economies and investors is growing. Populism brings nationalistic, anti-global policies, tariffs and trade restrictions, reduced economic growth, more autonomous ‘strong’ leaders, volatility and the weakening of institutions like the judiciary and mainstream media.

Populist leaders, like Le Pen, seek and gain power by polarizing society. Us and them. Strong borders. Germany for Germans. Italy for Italians. “Their governing style tends to centralize and personalize power in themselves and sideline institutional checks and balances,” concludes a paper by the Carnegie Institute. “Meanwhile, their actual policies scramble ideological categories.”

Key is setting up an irreconcilable tension between “the people” and “the elites,” or the “gatekeepers.” By making the masses feel oppressed, disenfranchised or unable to get what they want – like a house, financial security or a neighbourhood full of folks who look like them – attitudes are hardened and divisions made worse. They point to the wealth divide, or immigrant pressure on housing, on ‘porous’ borders and left-wing woke policies to argue that society is broken, current leaders corrupt and unethical. Only a cleansing can restore order and morality. Only a strong leader can do that.

“They claim that no part of a democracy should stand in the way of the people’s will—in other words, they stand for majoritarianism, not liberal democracy,” says the Carnegie research. “Since they have claimed to represent the will of the people, they can declare that anyone who disagrees with, questions, provides independent information, or slows down their plans is illegitimate and working against “the people.” Leaders using a populist strategy to maintain power use this logic to control or delegitimize independent or governmental institutions that could check their power, such as the press, statistical bodies, ombudsmen, and judiciaries.”

Sound familiar?

Sure it does. These are the tactics of Trump. He is above the law because the judge is corrupt and the elites are persecuting him. Any journalistic criticism is ‘fake news.’ He tells supporters immigrants are ‘poisoning the blood of country’ and will face mass deportations. His America First policies are based on universal trade tariffs and an anti-China strategy. Because he represents ‘the people’ and will carry their authority, he vows to use government to indict political enemies and bring ‘retribution’ upon them. Revenge. It’s good. Disinfectant.

Populism is pitted against globalism, which has allowed the freer movement of money and people. Corporations have expanded worldwide. Fortunes have been made. Immigration has expanded. Capital flows like a seamless, boundless river through borders and nations. This was all exacerbated by a pandemic that seemed to crush individual freedoms while making billionaires better off, followed by a wave of inflation and real estate madness rendering it harder for families. The conditions were perfect for malaise, and change.

That change is also transforming society, not just the economy. We are angrier, less tolerant, less cohesive, more suspicious, prone to conspiracy, untrusting of authority and disbelieving of what we read, hear or watch in the news. The rule of law is degraded when a man close to being the US president says an election he lost was stolen or a criminal conviction by jury is a sham.

But here we are. It’s going global. What to expect?

Populism zaps economic growth. Research has found that volatility increases and the risk of a financial crisis is heightened when an authoritarian populist takes control of a country. Policies reducing trade also wither national income and growth. Tariffs, immigration reduction and nationalism diminish GDP. Populist governments tend to counter that with increased public spending, which breeds greater public debt and inflation. In the end, the problems they vowed to fix only get worse.

As far as history is concerned, populism leads to disaster. Always.

But it’s different this time, right?