Voters always vote for parties promising – particularly economic – progress, and especially parties that have delivered progress in the past. Over the past few decades, in the US and Europe that has, indeed, been achieved under the leadership of the old traditional parties. They have increasingly extrapolated that success to the future, too, adopting laws – especially in the area of social support and pension provisions – that can only be financed in the future if economic growth remains high and tax revenues therefore continue increasing.
Politicians have never told voters that high growth was largely based on debt accumulation and that, naturally, it could not continue forever. However, the credit crisis made it more than clear that the limits have been reached, if not exceeded, in that respect. Therefore, the promises politicians made, and the expectations they raised are suddenly not being fulfilled. After a number of decades where it seemed that the sky was the limit, suddenly austerity measures are required, and consumers’ uncertainty regarding the financial future is steadily growing.
Voters in the West are therefore greatly disappointed in the traditional parties. The political void that has been created is rapidly filling with populists. By populists, we mean parties that do not first analyze all the facts and problems, and then draw conclusions as to the best policy to follow but, instead, turn things around. In southernEurope, for example, many politicians claim there is no point in the government implementing further austerity measures, and that they are simply pushing the economy ever further into the abyss. They then add that wages must not be cut, as that suppresses the demand side of the economy. Working longer hours for the same salary is also out of the question, because that creates too much unemployment. In their view, it is far better to tax high incomes more heavily, to allow the government to reduce its budget deficits. The idea of the government having a smaller role in the total economy is entirely out of the question as it would cost jobs (this is an easy message for winning voters if half or more of jobs depend in one way or another on government expenditures).
In principle, these are all sound judgments, which therefore appeal to a lot of disappointed voters. However, the effects only aggravate the underlying problem, which is not being addressed.
The old established parties should give a clear answer to this, but they do not dare. What they should be saying is that they have promised voters too much in the past and allowed debts to mount too high, and that we therefore now have to take a bitter pill to restore the economy to health. That is not exactly the message most voters are waiting for, which gives all the more elbow room for the populists.
Populist movement in the strong EMU countries are gaining ground rapidly as well. What they want is aid to the weak countries to be halted, as it is only costing taxpayers in the strong countries money. After all, the weak countries will almost certainly not be able to repay their debts in the future. However, what they are not mentioning is that, if no further assistance or loans are extended, the weak countries will immediately become insolvent, and will not be able to repay their debts, either. The EMU will then fall apart as well, and will no longer be able to operate as a single block in the future. But it is in everyone’s interest that Europe stays together. This is necessary as Europe faces two gigantic problems in the future:
- The Western population will age considerably and, in many cases, shrink. This means higher government expenditures – especially on healthcare and social support – and lower tax revenues. The latter means there will be a smaller working population to repay existing debts.
- The emerging countries –China,India, other Far Eastern countries, and Brazil, in particular – are fast gaining competitive power. If that was not already enough of a challenge, those countries are consuming ever more commodities, which are available in only limited quantities. They are even vastly increasing their armies to ensure that supply.
The individual EMU countries can only seriously tackle these problems if the EMU continues to form a block. Otherwise, within a number of decades, the EMU countries operating individually will be steamrollered by the major blocks – not only politically, and militarily (which is important when it comes to transporting commodities), but also economically.
What this means for EUR/USD and long term interest rates will be thoroughly explained in our regular ECR research reports. For a free trial, click here.