Brave EU World: Europe must embrace change if it wants to survive nationalism

Illustration by Wikimedia Commons

Populism is on the rise; demands for a more equitable society are blending with confused nationalist remarks, which are threatening liberal democracies as we know them. The European Union should not fight but embrace the protest, and support the fight for social justice — otherwise radical tendencies might degenerate into authoritarianism and the European Union itself might cease to exist.

If just a few years ago someone told me of the political transformations I witnessed recently, I would have considered such predictions merely as fictious. A series of political outcomes, starting with the Brexit vote, has gradually made populism increasingly dominant in the political arena. While this is undeniably a global phenomenon, Europe perfectly epitomizes these trends. Populist parties, which are already in several governments of the union, are still growing their base. predicts that the League, Italy’s nationalist party which in 2014 gained five of Italy’s seats in the European Parliament, will rise to 29 seats in the next election, while the pro-Europe former governing Democratic Party will halve its seats from 31 to 16. Similarly, populist or nationalist parties are expected to gain many more seats in most countries. Even the French president Emmanuel Macron, celebrated as the standard-bearer of liberal Europeanism, is dealing with a violent confrontation with domestic protests by the gilets jaunes — or yellow vests — and could see his party overtaken by the far-right National Rally in the European parliamentary election. It is clear that we are living through a complex transitional period, one in which the so-called populist forces are increasingly dominant. What is less clear is how this all started and where it will lead us.

Many factors are potentially at play behind this political shift. Economic processes undoubtedly played a big role. In particular, rising inequalities are commonly seen as a major source of discontent. The share of national income earned by households at the top of the income distribution has dramatically increased from the 1980s onward: the World Inequality Database shows that in 2012 the income of the top 1% of households accounted for 22.5% of total income, the highest figure since 1928. In his famous book Capital in the Twenty-First Century, the French scholar Thomas Piketty blames the insufficient taxation of speculative finance and inherited wealth. Inequality also rose in terms of low social class mobility: according to the think tank Resolution Foundation, between 1976 and 2004 upward mobility rates fell for women and men in the UK, while downward mobility rates increased . In a study of surnames’ correlation, Gregory Clark from University of California and Neil Cummins from Queens University conclude that social mobility in England in 2012 was little greater than in preindustrial times.

In her recent book The Value of Everything, Mariana Mazzucato of University College of London indirectly offers an alternative explanation for rising inequalities. She argues that by confounding the creators of value with those who extract it or destroy it, some financial elites have been able to extract much of the gains of economic growth in the past decades. In the same way, government action has been impaired, leaving it incapable of fixing this dysfunctional process.

In addition, growing economic integration in the past several decades has introduced new competitors in the market and led to many small-scale companies shutting down because they lacked the required capital to innovate and compete. Trade liberalisation also added pressure on governments to promote industrial competitiveness, which has often translated into labour market reforms to increase flexibility and reduce employment protection. Such reforms at a time of depressed growth have not only ended up increasing unemployment in some countries (e.g. Italy), but also passing the burden of increased competition to the labour market. The realized economic gains from trade were often distributed unfairly, leading to stagnant wage growth for lower-income employees. Unfortunately for the mainstream parties, the voting power of the workers didn’t diminish proportionally to their earnings, and the result has been a political shift towards new parties promising to better protect workers.

The economic factors were exacerbated by the 2008 financial crisis. The crash — caused by financial institutions which were then rescued by taxpayers’ money — led to a long period of economic stagnation and weak productivity growth, whose cost was borne mainly by the lower-income classes, the consequences of which can still be felt today in many European countries. On top of this, the crisis made political and financial elites lose their credibility by looking incompetent. To this gloomy picture, add years of austerity which in many countries eroded the quality of important services such as healthcare and education. Then it is easy to explain — and perhaps justify — the recent political trends.

Other sources of discontent include technological unemployment and immigration. The positive long-term effects of new technologies are undisputed, but automation has caused significant job losses in the short-term. On the other hand, whether immigrants actually “steal our jobs” is debatable, but they provide a good scapegoat for people’s anger, fueling nationalism.

What is most worrying is that this might just be the starting point. These issues are not fading away. While inequalities are rising, adding to the frustration of the bottom 90%, the welfare state is shrinking and governments are increasingly impaired by large debts and stringent European budgetary rules. At the same time, even the most optimistic analysts agree that technologies will soon disrupt a hell of a lot of jobs — and immigration from Africa and Middle East does not seem to be stopping any time soon, offering voters an easy target to blame.

European institutions, in response, are relentlessly projecting themselves as the defenders of this old dysfunctional system — the very system causing so much discontent. When the newly elected Italian government proposed its budget for 2019, the European Commission stepped in and rejected it, as it implied 2.4 per cent of fiscal deficit for a country where debt is over 130 per cent of GDP. While this verdict might appear sensible, the main measures proposed in the budget were the introduction of an income support scheme to fight poverty and a reduction in the retirement age, in the hope to free up vacancies for the young unemployed. In addition, Italy’s fiscal discipline has been among the most virtuous in Europe, running a fiscal surplus every year since 1991, with the only exception being 2009; but years of austerity have dried up economic growth, preventing the debt/GDP ratio from decreasing. It’s no wonder then why Italy, once among the most enthusiastic supporters of the European project, is turning Eurosceptic. The European Commission, on the other hand, did not show the same vigilance in the fight against tax avoidance by multinational corporations: the 2014 Luxemburg Leaks scandal, for example, highlighted how Luxemburg helped multinationals save millions in tax, creating unfair competition between countries. However, since these arrangements did not breach any European law, the only charges following the scandal were against the whistle-blowers.

The perception that the European institutions are merely concerned with fiscal discipline and not with social problems explains why the widespread social discontent translates into growing Euroscepticism and reviving nationalism. In his book, The People vs. Democracy, the Harvard political scientist Yascha Mounk describes how liberal democracy can degenerate into “undemocratic liberalism”, in which individual freedoms prevail over the public sphere, or “illiberal democracy”, in which social and collective values oppress individual freedom in the name of the people. Most importantly, he argues that undemocratic liberalism, particularly economic liberalism, leads to illiberal democracy. Indeed, Mr Mounk’s ideas proved prophetic, as today we are witnessing the rise of nationalism and populism as a reaction to a perceived lack of democracy. Unless an exogenous event changes the direction of these trends, frustration will keep growing until it reaches a breaking point in which anything can happen: from an amendment of the treaties, to, as Yascha Mounk described, the rise of autocratic regimes.

EU institutions’ love for fiscal discipline originated in 1992 with the criteria set in the Maastricht Treaty, which imposed signatory countries to— among other things — limit their public debt to 60 per cent of GDP and deficit to 3 per cent of GDP. These rules, however, turned out to be difficult to enforce fairly, as big countries such as Germany and France often breached them without being sanctioned. These numbers have also been criticized for being chosen arbitrarily and for being too inflexible — that is, not taking into account the phase of the business cycle. This is particularly problematic for the Eurozone, which cannot rely on country-specific monetary policy for stabilising the economy. In response to the 2008 financial crash, for example, governments rescued the economy by pumping money into the financial system and by taking over private assets. However, in order to finance these operations, the abovementioned rules compelled many European governments to enforce harsh austerity programmes, reducing spending in areas which are crucial for long-term growth, such as education, infrastructure and healthcare. In other words, the private sector created the crisis, but the public sector paid (and is still paying) the consequences.

The side effects of fiscal rigidity are worsened by monetary rigidity, with a European Central Bank (ECB) whose unique mandate is price stability, while growth, employment and financial stability are secondary objectives. This helps explain why in the wake of the crisis, and then again in 2011, the ECB raised interest rates, and why its stimuli proved “too little, too late” compared to those of the Federal Reserve and the Bank of England. At the peak of the eurozone crisis, Mario Draghi famously proclaimed that: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” Even this historical quote suggests that with a broader mandate, the central bank could have acted earlier, justifying the measure on the grounds of preserving financial stability and growth, as other central banks did.

Furthermore, there is a long-standing criticism of the lack of democratic legitimacy of the European Institutions, which partly led to the creation of the European Parliament in 1979. The German Constitutional Court in 2009 concluded that the European Union presents a decision-making process similar to that of an international organisation, and that it is problematic to reconcile the principle of equality among nation states with the principle of equality among citizens, which applies within states.

This perceived democratic deficit, together with the existent rules and mandates mentioned above, contribute to portraying the European institutions as detached from the European citizens. Following the result of the Italian elections in 2018, the European Budget Commissioner Günther Oettinger was reported to have commented: “The markets will teach the Italians to vote for the right thing”. Regardless of the authenticity of such statement (he later apologized and blamed the journalist who interviewed him for exaggerating his original comment), European elites should stop frowning upon all the allegedly populist governments and considering them as mistakes — or by-products — of democracy. Instead, they should interpret these outcomes for what they really are: manifestations of deeper underlying problems of our society. The EU should not fight this wave of discontent; it should embrace it and channel it in the right direction. European institutions need to modernize and project themselves as the builders of a more sustainable and inclusive society. Workers should be protected against technological unemployment and foreign competition through European IT trainings and innovation schemes, and a comprehensive investment plan in green technologies should be devised. Fiscal discipline is necessary, but it should be contingent on the phase of business cycle. These initiative should be promoted by the most prominent EU institutions and leaders. In this way, they can increase their popularity (which is much needed) and, at the same time, influence the direction of the change, avoiding potentially autarchic or authoritarian outcomes.

Unfortunately, however, reality is different. In a confused reaction to the rise of populist movements, representatives of the EU have only managed to scold them and directly or indirectly accuse people of not understanding what’s best for them. Indeed, this is unavoidable in light of (1) the current institutional set up, which prioritizes fiscal and monetary discipline, and (2) an underlying ideological confusion among mainstream parties about crucial themes such as the role of government, inequality, technology and immigration — especially on the left side of the political spectrum. The response to certain issues has been relatively prompt (such as data treatment, which has been addressed by the General Data Protection Regulation), but a serious response to problems like wealth distribution requires an ideological coordination which currently is just a fantasy.

What lies ahead, then? In her book Technological Revolutions and Financial Capital, the British-Venezuelan scholar Carlota Perez argues that following every technological boom, such as the ICT revolution, there is a phase of growing inequality and political unrest, in which asset bubbles may burst. The book was published in 2003, in a sense foreseeing the financial crash, the debate on inequality and the rise of populism. According to Ms. Perez, however, after the initial disruption, the need for political regulation of the financial sector is acknowledged and the social structure and infrastructure adapt to the new technologies.

What is difficult to predict is how bad this phase can get. This will depend on both domestic and foreign factors. Domestic variables include the long-term effect of integration policies — such as the Erasmus programme for university students — which might start showing up in the polls and soften the nationalist tendencies. The outcome of the upcoming parliamentary elections, on the other hand, might either quell the public discontent or reinforce it. Events abroad are important too: another crisis in Africa or Middle East, triggering a larger inflow of immigrants, would probably encourage nationalism, while a confrontation requiring the united political involvement of EU countries (e.g. Brexit) might promote unity and weaken nationalist parties like Alternative for Germany. At the same time, another financial crisis might exacerbate inequality and therefore broaden the support for the 5 Stars Movement in Italy and the Yellow Vests movement in France.

Certainly, voters’ dissatisfaction will not fade away any time soon. In order to survive and avoid authoritarianism, the European Union needs to meet their demands for social justice and convince them that Europe still has their interest at heart.