Strong Economic Leadership Can Stem Europe's Populist Tide

The European Union survived the great populist rebellion of 2017, but few believe the threat from antiestablishment euroskeptic parties has gone away.

Populist parties didn't win any elections last year, but they made significant gains: The far-right Freedom Party is now the largest opposition party in the Netherlands; the far-right Alternative for Germany party likewise will be Germany's largest opposition party if Chancellor Angela Merkel succeeds in forming another grand coalition from her Christian Democrats and the Social Democrats; in Austria, the far-right Freedom Party is the junior coalition partner in the new government. Meanwhile the Polish and Hungarian governments continue to pursue populist domestic agendas Brussels believes threaten the rule of law.

True, the prospects for a major populist breakthrough in 2018 look slim. The major elections this year are in Italy, Hungary and Sweden. In Hungary, no change is expected. Prime Minister Viktor Orban's Fidesz party has a substantial lead over the far-right Nationalist Jobbik party. In Sweden, support for the nationalist Sweden Democrats party has slumped to 14.5% from a peak of over 20% in 2015 at the height of the refugee crisis, according to a major poll published in December. The main focus is therefore on Italy, where the antiestablishment 5 Star Movement leads the polls and the euroskeptic Lega is also gaining support. But under the current electoral law, most analysts expect an inconclusive outcome that will require the formation of a broad coalition.

But what of the populist challenge beyond 2018? Any answer depends partly on what is identified as driving the support for anti-globalization euroskeptic parties. How much of their rise represents a reaction to the refugee crisis of 2015 and opposition to immigration more broadly? How much reflects cultural anxieties, as citizens increasingly feel their identities and traditions are being eroded? And how much is fueled by tough economic conditions following the global financial crisis and eurozone debt crisis, including high unemployment, stagnant wages and job insecurity, which has undermined confidence in political elites?

Of course, this debate has been raging on both sides of the Atlantic, and the answer may lie in a mixture of these factors.

Nonetheless, a paper published last year by the Centre for Economic Policy Research in London found a strong economic link to support for populist parties. The study found that a 1-percentage point increase in unemployment tends to lead to a 1-percentage point increase in support for populist parties. The study was conducted by four European economists -- Yann Algan, Elias Papaioannou, Evgenia Passari and Sergei Guriev, chief economist of the European Bank for Reconstruction and Development.

The study also found a clear correlation between unemployment and negative attitudes toward the EU, with rising joblessness leading to falling trust in EU and national political institutions and courts. This poses a particular problem for the EU: The eurozone debt crisis exposed serious shortcomings both in the eurozone's institutional structure and in the structures of the many countries' labor markets, which led to the sharp rise in unemployment. That highlighted the need for structural overhauls both at eurozone and national level to encourage investment and make it easier for economies to reallocate resources to more productive sectors. Yet delivering these sort of structural changes requires trust. If it's lacking, there will be fewer reforms, and so unemployment will remain higher.

The good news for the EU is that not only is the eurozone economy growing and unemployment falling -- down to 8.8% from a peak of just over 12% in 2013 -- but this is being accompanied by rising trust and support for the EU.

Optimism toward the EU economy is now at its highest level since 2010, while optimism about national economies is at its highest since 2007. Support for euro membership now stands at 74% among euro-area citizens, its highest level since 2004, with 21% opposed, according to the EU's latest Eurobarometer opinion survey, published in December. Meanwhile, 40% of EU citizens now have a positive image of the EU, compared with 37% who have a neutral image and 21% negative.

But are the various grand coalitions and minority governments in whose hands the fate of Europe now rests really capable of driving the overhauls needed to transform job markets and kill off the populist threat for good? Or will the tendency of some mainstream parties to respond to the populist challenge by adopting aspects of their agendas -- including policies on immigration and treatment of refugees -- legitimizeeuroskeptic parties and polarize political debate, making it harder to deliver reforms at national and EU level?

Europe's mainstream politicians earned a reprieve in 2017. But the longer-term stability of European politics depends on whether they will be able to seize the opportunities provided by a booming economy in 2018.

Write to Simon Nixon at simon.nixon@wsj.com

The European Union survived the great populist rebellion of 2017, but few believe the threat from antiestablishment euroskeptic parties has gone away.

Populist parties didn't win any elections last year, but they made significant gains: The far-right Freedom Party is now the largest opposition party in the Netherlands; the far-right Alternative for Germany party likewise will be Germany's largest opposition party if Chancellor Angela Merkel succeeds in forming another grand coalition from her Christian Democrats and the Social Democrats; in Austria, the far-right Freedom Party is the junior coalition partner in the new government. Meanwhile the Polish and Hungarian governments continue to pursue populist domestic agendas Brussels believes threaten the rule of law.

True, the prospects for a major populist breakthrough in 2018 look slim. The major elections this year are in Italy, Hungary and Sweden. In Hungary, no change is expected. Prime Minister Viktor Orban's Fidesz party has a substantial lead over the far-right Nationalist Jobbik party. In Sweden, support for the nationalist Sweden Democrats party has slumped to 14.5% from a peak of over 20% in 2015 at the height of the refugee crisis, according to a major poll published in December. The main focus is therefore on Italy, where the antiestablishment 5 Star Movement leads the polls and the euroskeptic Lega is also gaining support. But under the current electoral law, most analysts expect an inconclusive outcome that will require the formation of a broad coalition.

But what of the populist challenge beyond 2018? Any answer depends partly on what is identified as driving the support for anti-globalization euroskeptic parties. How much of their rise represents a reaction to the refugee crisis of 2015 and opposition to immigration more broadly? How much reflects cultural anxieties, as citizens increasingly feel their identities and traditions are being eroded? And how much is fueled by tough economic conditions following the global financial crisis and eurozone debt crisis, including high unemployment, stagnant wages and job insecurity, which has undermined confidence in political elites?

Of course, this debate has been raging on both sides of the Atlantic, and the answer may lie in a mixture of these factors.

Nonetheless, a paper published last year by the Centre for Economic Policy Research in London found a strong economic link to support for populist parties. The study found that a 1-percentage point increase in unemployment tends to lead to a 1-percentage point increase in support for populist parties. The study was conducted by four European economists -- Yann Algan, Elias Papaioannou, Evgenia Passari and Sergei Guriev, chief economist of the European Bank for Reconstruction and Development.

The study also found a clear correlation between unemployment and negative attitudes toward the EU, with rising joblessness leading to falling trust in EU and national political institutions and courts. This poses a particular problem for the EU: The eurozone debt crisis exposed serious shortcomings both in the eurozone's institutional structure and in the structures of the many countries' labor markets, which led to the sharp rise in unemployment. That highlighted the need for structural overhauls both at eurozone and national level to encourage investment and make it easier for economies to reallocate resources to more productive sectors. Yet delivering these sort of structural changes requires trust. If it's lacking, there will be fewer reforms, and so unemployment will remain higher.

The good news for the EU is that not only is the eurozone economy growing and unemployment falling -- down to 8.8% from a peak of just over 12% in 2013 -- but this is being accompanied by rising trust and support for the EU.

Optimism toward the EU economy is now at its highest level since 2010, while optimism about national economies is at its highest since 2007. Support for euro membership now stands at 74% among euro-area citizens, its highest level since 2004, with 21% opposed, according to the EU's latest Eurobarometer opinion survey, published in December. Meanwhile, 40% of EU citizens now have a positive image of the EU, compared with 37% who have a neutral image and 21% negative.

But are the various grand coalitions and minority governments in whose hands the fate of Europe now rests really capable of driving the overhauls needed to transform job markets and kill off the populist threat for good? Or will the tendency of some mainstream parties to respond to the populist challenge by adopting aspects of their agendas -- including policies on immigration and treatment of refugees -- legitimizeeuroskeptic parties and polarize political debate, making it harder to deliver reforms at national and EU level?

Europe's mainstream politicians earned a reprieve in 2017. But the longer-term stability of European politics depends on whether they will be able to seize the opportunities provided by a booming economy in 2018.

Write to Simon Nixon at simon.nixon@wsj.com

(END) Dow Jones Newswires

January 07, 2018 18:03 ET (23:03 GMT)