Tuesday, 27 May 2014

The Economics behind Populist Parties in Europe

Voters kick up a stink in the European elections but mainstream politicians only have themselves to blame

The success of anti-EU parties in the European elections has been in the news over the past week but it is economics that provides much of the backstory.  Voters in Europe have flocked to political parties offering the illusion of a way of opting out of the changes that threaten their livelihoods.  Such frustration is understandable considering that the more established parties have only offered up piecemeal measures as a solution.  Acceptance of the limited options available will be the first step to making real progress.

Going with the flow

The economic prospects of those with few skills are dire.  Many of the sectors that provided jobs for workers in earlier generations have shrunk due to the double whammy of technology and globalization.  Gains in technology have seen a rise in the mechanization or computerization of many tasks.  Globalization has allowed firms to search the world to find the cheapest workers.  These are not trends that are expected to change anytime soon.

Despite the large number of those put out by these trends, the benefits for the economy as a whole have been unprecedented.  Technology has brought a wealth of information and possibilities to our fingertips and outsourcing has made the bulk of things we buy much cheaper.  There is no one who has not gained in some way with the overall gains far outweighing the costs.  The problem is that these costs are borne by a relatively limited number.

In an ideal world, some of the wide spread benefits would be used to compensate those missing out due to the rise of technology and globalization.  However, governments in the Western world have been moving in the opposite direction.  People are increasingly left to fend for themselves with few hand-outs from the government.  The affected workers need money during periods without work as well as help with reskilling to move into growing industries.  Yet, unemployment benefits are being trimmed back and education is becoming more expensive. 

Instead, governments look to shield themselves from the blame, and since no one is going to come out against technology, globalization is the obvious fall guy.  The EU takes the blame in Europe as the epitome of the uncontrollable external forces pushing for more open borders.  Rather than admit that they are almost powerless in the face of outside influences which are part of globalization, politicians offer temporary reprieves.  Typical responses include attempts to limit immigration, moves to block factory closures, railing against takeovers by foreign firms, or moaning about a strong currency hurting exports.  The failure of such actions to have any substantive effect leaves governments open to criticism.  Hence, the rise of political parties proposing to do more.

A dose of honesty

The policies of populist parties will not offer any long-term respite.  It is possible for an economy to shut itself off from the global economy.  However, fighting against the tide of history is not a long term option - a faster pace of economic growth in other countries which are more open will inevitably reveal the folly of such isolation.  Instead of being a viable alternative, the anti-immigration political parties tend to function as a form of protest for voters to vent their frustration at the status quo.  But there is still the possibility of one of these protest parties snatching power, likely with dire consequences.

The main remedy might be something as simple as a bit of honesty.   Politicians need to be more open with voters about the limits of their policies.  This would give them the scope needed to deal with the negative effects of technology and globalization which need more than ad hoc measures.  Long term investment in education and infrastructure will be key in terms of both dealing with the negative and reaping the most benefits.  Now is the time for governments to step up and act or else face a more rapid tumbling down the global pecking order.  Politicians and voters need to come to their senses.  And soon.

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