Populist economic policy and how to respond to it

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Europe's populists often provide oversimplified answers to complicated problems. Matteo Salvini (M5S) and Geert Wilders (PVV). [Marco Aprile/ Shutterstock]

It is crucial to explain to voters what the populist agenda is, why it is misleading and how national governments and the EU can respond, writes Ifo President Clemens Fuest.

Clemens Fuest is President of the Ifo Institute and co-author of the European Economic Advisory Group Report 2017.

Populism is sweeping across Europe, from the Front National and Geert Wilders’ Freedom Party to Italy’s M5S and the AfD in Germany. Populist support is driven by economic issues and by values like intolerance of foreigners and other religions. But what is populist economic policy?

Populists claim to design economic policies for people who feel abandoned by the political establishment. The populist economic agenda is characterised by short termism, the denial of intertemporal budget constraints, and a failure to evaluate the pros and cons of different policy options or the trade-offs between them.

It often focuses on single and salient political issues, overemphasises the negative aspects of international economic exchange and immigration and blames foreigners or international institutions for economic difficulties. Populists offer simplistic solutions to complex problems.

Populist macroeconomic policy is expansionary and short termist. It advocates higher public spending, promises tax cuts and plays down the adverse consequences of growing public debt or inflation.

The benefits of excessively expansionary fiscal and monetary policy tend to be felt fast, while the adverse consequences of growing debt burdens or even financial destabilisation take longer to emerge. But they inevitably will.

Populists oppose immigration, claiming that immigrants compete with natives in the labour market, take away their jobs, depress wages and bleed the welfare state. Rejecting the notion that migrants are refugees fleeing war and prosecution, populists claim that they are economically motivated and often enter host countries illegally.

Populists ignore that immigration can also have very positive effects, bringing new ideas and dynamism to host countries.

They vilify globalisation and international trade, accusing foreign companies or governments of dumping and unfair competition. Globalisation, according to populists, harms most of the domestic population and only benefits an elite that disseminates false information through biased ‘experts’.

Most populist parties oppose European integration as a loss of sovereignty for EU member states, decry the euro and challenge the freedom of movement for EU citizens. They also claim that supranational institutions evade democratic control.

Who supports populist parties and why?

Populist supporters see themselves as the victims of globalisation, international trade, capital mobility and notably migration. Economic crises also fuel populism due to the widespread perception that their costs are not borne by the “elites” deemed responsible, but by the “ordinary people.”

But populist support can also have non-economic roots in views and values like a low tolerance for foreign cultures and different religions. In the Brexit referendum, ‘Leave’ supporters tended to be older, less educated, low earners and people outside the workforce.

How can moderate politicians recapture the political narrative?

One way of dealing with populists is to isolate and ignore them. Another, arguably more successful strategy is to integrate populist parties and let them be part of coalitions, provided they respect the basic rules of democratic decision making.

If populism marks a reaction to a growing political convergence between the left and right wing, mainstream parties could crowd back populism by offering a larger spectrum of political programmes and views.

To some extent, governments may sap populist support by changing their economic policies. More redistributive taxes and higher minimum wages may boost the income of low-earners, albeit at the risk of raising unemployment.

Investing more in education and vocational training would also benefit low-skilled workers, and may enable them to find better paying jobs, although the potential of professional training is limited. Populist politicians simply ignore these trade-offs.

A way to combat manipulative, post-truth political campaigning would be to ask a neutral institution to analyse the economic policy agendas of all parties standing for election. This would force them to submit an agenda complete and consistent enough to stand up to evaluation and serious public debate.

Such analyses are performed regularly in the Netherlands. They have not stopped Geert Wilders, but he may have been even more successful without them. Referendums play an important role in the constitutions of many countries, but governments should not be allowed to use them as a strategic instrument.

Delegating clearly defined tasks and responsibilities to supranational institutions like the EU may also help to rein in populism. Joining the EU marks a long-term commitment to adhere to fundamental principles of democracy, openness and the rule of law.

To protect the EU’s image, however, mainstream politicians should stop using it as a scapegoat for their internal economic and political problems.

EU policies should be transparent and comply with the principle of subsidiarity, while EU institutions, including the ECB, need to adhere more closely to their mandate. As for the European Commission, it should focus on its role as a guardian of the European treaties and withstand pressures to play a more political role.

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