How bad will it get? Get Prepared for Economic Nationalism

2016 was already quite miserable in so many respects. 2017 promises to get even worse. Looking at the chamber of horror President-elect Trump is putting together and assuming that he actually will 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 products regulations but also and more importantly in the area 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 not so much about neoliberalism than about economic nationalism where crude elements of growth-enhancing fiscal policy programs go hand in hand with mercantilistic 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 drafted – not only in the US but also across Europe. At this point, economic nationalism is only in open action in Hungary and, one can argue, in the making in Poland. In most European societies, economic nationalism has not yet arrived and so far only is the hymn of populist opposition parties. A optimistic scenario could make the case that this will also be the state of affairs during 2017. The victory of van der Bellen in Austria’s presidential election is then showcased as the lightning rod how political populism and economic nationalism can be prevented. Others make the point that this outcome should be seen as a exemption and that the Freedom Party in Austria actually may benefit from the victory of van der Bellen as voters will be more strict with their policy preferences when it comes to general elections where the victor has actual power to make political and policy changes.

Let me outline my nightmare scenario. It may probably need no further terrorist attack of Nice- or Berlin-style to make the Party for Freedom (PVV) led by Geert Wilders to the strongest party in the Netherlands in March. The PVV will not win a majority but will be in the position to form a new government that will leverage on the wide-spread rejection of the EU in general and of the Euro in particular. The path will be prepared for a referendum in 2018 about membership in 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, voters in France will eventually make Marine Le Pen to the first female President, and thus prepare the ground for a true turn towards economic nationalism that will change the French Republic as well as 60 years of European integration. 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 into the anti-EU fire, and a snap election eventually will make the Five Star Movement to the strongest party. Economic populism and strict anti-Euro sentiments will prevail and Italy will joint the queue of countries who want to give up the Euro. All those developments will generate second thoughts in Germany – one of the most EU-frendly countries – and will make the campaigns for both, Chancellor Merkel as well as for the Social Democrats to a delicate balancing act as voters see that the country is losing all its European partners, and may have to be the only leftover net contributor to a shrinking EU. Already in March negotiations with the UK about the details of the divorce will get more heated, and the strategy of the Commission to put a high price on the exit-option will run into difficulties as the fault lines in the EU are getting worse. The more countries are questioning the Euro and the EU, the lower the price for the UK.

Those 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, on the global level as well as on the regional level.

Fortunately, all this need not to 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…