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How Bad Can It Get? Prepare For Economic Nationalism

Kurt Huebner 5th January 2017

Kurt Huebner

Kurt Huebner

2016 was already quite miserable in so many respects; 2017 promises to get even worse. Looking at the chamber of horrors President-elect Trump is putting together and assuming that he will indeed prove at any price that he is the maverick President he promised to be during the campaign, then Washington D.C. will turn into the capital of evil, kind of.

For a long time, political observers from the left analyzed political and economic developments through the lenses of neoliberalism. This concept had at its core the idea that only unfettered markets can deliver growth, jobs, income and wealth. Getting rid of ‘red tape’ not only in the realm of product regulation but also and more importantly in that of environment, labor markets and financial industries was the hallmark for any neoliberal project in the world of western capitalism. This project has come to an end. 2017 will be about economic nationalism where crude elements of growth-enhancing fiscal policy programs go hand in hand with mercantilist and protectionist policies that will erect barriers not only for the flow of goods and services but also for labor.

The scripts for a policy turn from forms of neoliberalism to economic nationalism are already drafted – not only in the US but also across Europe. At this point, economic nationalism is only openly active in Hungary and, one can argue, in the making in Poland. In most European societies, economic nationalism has not yet arrived and, so far, is the hymn of populist opposition parties alone. An optimistic scenario could make the case that this will also be the state of affairs during 2017. The victory of Alexander Van der Bellen in Austria’s presidential election is the lightning rod for ways in which political populism and economic nationalism can be stopped from becoming official policy. Others make the point that this outcome should be seen as an exemption from the emerging populist trend, and that the Freedom Party in Austria may benefit from Van der Bellen’s victory as voters will be stick to their policy preferences when it comes to general elections where the victor has real power to make political and policy changes.

Let me outline my nightmare scenario. It probably needs no further terrorist attack on Nice or Berlin lines to make the Party for Freedom (PVV) led by Geert Wilders the strongest party in the Netherlands in March. The PVV may not win a majority but will be in position to form a new government that will leverage on the widespread rejection of the EU in general and of the Euro in particular. The path will be prepared for a referendum in 2018 about membership of the Eurozone, and during 2017 a PVV-led government will start to introduce those parts of its project of economic nationalism that can be put in place by pure national decision-making.

Encouraged by this victory and supported by the lack of alternative political offers from the left, voters in France will eventually make Marine Le Pen their first female President, and thus prepare the ground for a true shift towards economic nationalism that will change the French Republic as well as 60 years of European integration. The Euro will be put to a referendum, and at the same time a President Le Pen will start with her moves to protect French workers from international competition. Anti-Islamist policies will provide the public support for this project of path change. In Italy, we will see political fights between the European Council and the Italian government about dealing with the ailing banking industry. The attempt to circumvent strict EU rules will only add fuel to the anti-EU fire, and a snap election eventually will see the Five Star Movement emerge as the strongest party. Economic populism and strict anti-Euro sentiments will prevail and Italy will join the queue of countries who want to give up the Euro.

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All those developments will generate second thoughts in Germany – one of the most EU-friendly countries – and will turn the campaigns for both Chancellor Angela Merkel as well as for the Social Democrats into a delicate balancing act as voters see that the country is losing all its European partners and may be left as the sole net contributor to a shrinking EU. The European pillar of Germany’s political economy will gradually crumble. As soon as March, negotiations with the UK about the details of the divorce will heat up, and the Commission strategy of putting a high price on the exit-option will run into difficulties as the fault lines in the EU are getting worse. The more countries question the Euro and the EU, the lower the price for the UK – and the less attractive the project of European integration becomes.

These internal developments come hand in hand with the challenges posed by the dramatic policy changes in the US. The Trump administration will interpret the sliding exchange rate of the Euro as a further proof of European mercantilism and retaliate with trade policy measures that put export-oriented economies like Germany and the Netherlands under intense external pressure. Retaliation will become the policy of the day. All this will result in a disintegration, at the global as well as at the regional level. The emerging trade and currency war will be a further push towards economic nationalism (if any were needed).

Fortunately, all this need not happen. Voters may come to their senses. Evidence may return to become the base for political decisions. Political alternatives for dealing with the implications of twenty years of forms of neoliberalism may emerge. I keep on dreaming…

Kurt Huebner

Kurt Huebner is Professor of European Studies and the Jean Monnet Chair at the Institute for European Studies at the University of British Columbia, Canada.

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