Nationalism, like any political idea, is a spectrum of views not an absolute. As UBS notes in an interesting article today, the policies of Golden Dawn are not the policies of the True Finns of Finland, or the Freedom Party of Austria. However, there is undoubtedly a trend within the Euro area in favour of those parties that promote nationalistic policies (perhaps defined as the aggressive pursuit of domestic or indigenous interests over regional interests) and this trend raises considerable questions over the future of the Euro. The first and most obvious consequence of a rise of nationalism within the Euro area is that it will make managing the Euro crisis ever more complex to resolve. The other issue that arises from the rise of nationalist parties in the Euro area takes us away from the specifics of the Euro integration. Nationalism very readily turns into prejudice against others. UBS' Paul Donovan adds that the Euro area will work best when it recognises and uses its economic resources (people in this instance) to the best advantage. Festering resentment and nationalism is unlikely to produce that sort of a climate. Given how important it is to restore competitiveness to the Euro area economy, this is not a negligible economic cost.
UBS - Paul Donovan: My country, right or wrong
The noise around Greek politics and indeed European politics in general is not likely to dissipate any time soon. Indeed, the cacophony seems only likely to increase. Investors who expected to spring from their beds on Monday morning to find a Greek government in place, stable, and willing to carry on with the Troika’s memorandum of understanding are sadly (if predictably) disappointed. Ahead lies a lot more politics, which financial markets are singularly ill equipped to factor in to asset prices, and which media and markets alike are more likely to be misled or misinformed about. Beneath the political noise about negotiating coalitions and renegotiating bail outs, there is a sub-current in Euro politics that markets might wish to examine.
Recent elections have brought with them an undercurrent of political nationalism. Golden Dawn in Greece captured almost 7% of the vote in the 17th June elections, having held onto their popular support levels from the earlier poll this year. One can readily argue that, from the other end of the spectrum, Syriza has also campaigned on a nationalist platform. In France, the Front Nationale has achieved national assembly representation for the first time in decades, and established itself as the third party of France with 14% of the popular vote in the assembly first round. The True Finns are already the third party of Finland, with over 19% of the vote in the last parliamentary election. Ireland’s Sinn Fein lies in second place in recent opinion polls. Nationalist or nationalist inclined parties have gained and retained support in the Euro area as the Euro crisis has developed.
Nationalism, like any political idea, is a spectrum of views not an absolute. The policies of Golden Dawn are not the policies of the True Finns of Finland, or the Freedom Party of Austria. However, there is undoubtedly a trend within the Euro area in favour of those parties that promote nationalistic policies (perhaps defined as the aggressive pursuit of domestic or indigenous interests over regional interests).
Why nationalism now?
The question of why nationalist parties are gaining electoral support is important, as it may help to understand the potential impact on more mainstream political thinking. It may also give some guidance as to the longevity of any nationalist movement. While nationalist parties have often had high profile, charismatic leaders it is clear that leadership alone is not the deciding factors. Many Euro area nationalist parties have maintained electoral support after the loss of their leaders.
There appear to be two common factors that characterise the supporters of Euro area nationalist parties. The first, and perhaps the least surprising, is that they tend to come from the economically insecure. This is not (necessarily) the same as the lowest income groups in society – though that is the case in some instances. Rather, it is more likely to be those in society who feel themselves as being most at risk in economic terms. That implies that they have something to lose (thus are not the lowest income groups) and that they feel threatened The global financial crisis, and the particularly protracted nature of the Euro financial crisis, has facilitated the growth of the economically insecure as a political class. It also helps to explain why nationalism is as prevalent (if not more prevalent) amongst the non-peripheral economies than it is amongst the periphery. The better off economies contain voters who fear for their existing prosperity, and who turn to nationalism as a defender of that prosperity.
The second common characteristic of the supporters of nationalist parties in the Euro area would appear to be hostility to immigration. This is often characterised as economic hostility, and very often the sentiment is expressed in terms of a country being “full” – which has economic overtones and feeds into the economic insecurity. However, cultural concerns also appear to have played a role in fostering Euro area nationalism, at least in the run up to the global financial crisis. Supporters of nationalist parties are fearful that their own culture is being “overrun” by immigrants, and unique national characteristics are being homogenised, or even replaced by alien cultures.
This cultural concern of course resonates particularly strongly in some parts of the Euro area where the national interests are viewed as being subordinated to Euro policy prescriptions. As the Euro crisis encourages further common policy approaches with occasionally painful economic side effects, this trend could very well continue.
Consequence 1: The Euro
The first and most obvious consequence of a rise of nationalism within the Euro area is that it will make managing the Euro crisis ever more complex to resolve. Weaker countries that need to receive assistance will resent the conditions imposed upon them from outside (and may seek to cast the domestic problems as being caused by foreign forces). This very much characterises the Greek attitude at the moment, but arguably is evident in some of the political comment in economies like Ireland.
At the same time, stronger economies that are called upon to provide economic aid for the common good are likely to resent the fact that their relative prosperity is being diverted from national uses – and that their economic outlook could potentially be made more insecure by association with the weaker economies.
This unhappy combination then leads to resentment against the Euro or European institutions – despite the fact that the Euro’s crisis can ultimately only be resolved by choosing to “integrate, or die” (with the fragmentation of the latter option generating economic consequences that are likely to be very severe indeed). The resentment seems to be stronger amongst the weaker economies – the latest Pew Research Center survey on European attitudes reported that 83% of Greek’s believe that the power of European nations is a major threat to their economic welfare, and 70% that European integration has weakened their economy. This sentiment is seen elsewhere – 63% of the French thought integration had weakened their economy in the same poll.
The challenge is that if the Euro is to hold together (and we believe it will) these nationalist sentiments must be subsumed into a regional sentiment. Fiscal confederation should not be about “German money” going to “Greece”, or whatever combination1. Instead fiscal confederation should be about wealthier Euro citizens funding assistance to less wealthy Euro citizens. To get beyond the national boundaries implicit in the current national sentiment is essential to the eventual and necessary integration of the Euro area.
For the time being the presence of nationalism in the Euro area, and the impact it has on mainstream politics, is likely to lead to “red lines” in Euro area negotiations. There are some issues that negotiating governments will not be able to compromise over, in the current more nationally inclined environment. This applies to all sides of the negotiating table, stronger as well as weaker. Distinguishing between those points that are genuinely “red line” issues, and those that are simply bargaining positions to be surrendered for other concessions will be important to investors.
Consequence 2: Competitiveness
The other issue that arises from the rise of nationalist parties in the Euro area takes us away from the specifics of the Euro integration. Nationalism very readily turns into prejudice against others. Indeed the hostility to immigration that is a common characteristic of Euro area nationalism is something that arouses considerable concern amongst economists. Prejudice is something that is economically undermines competitiveness.
The issue here is that prejudice is irrational discrimination against a group in society (for whatever reason – but hostility on the grounds of nationality is one of the commoner forms). As such, it is economically inefficient. Economic efficiency is meritocratic, and has no room for irrational discrimination – effectively prejudice is a manifestation of Luddite behaviour in the twenty first century – rather than destroying physical capital, prejudicial behaviour wastes human (intellectual) capital.
There is a real risk that by fostering an environment where political nationalism develops, the ensuing prejudice will undermine competitiveness and productivity in the Euro economy. The Euro area will work best when it recognises and uses its economic resources (people in this instance) to the best advantage. Festering resentment and nationalism is unlikely to produce that sort of a climate. Given how important it is to restore competitiveness to the Euro area economy, this is not a negligible economic cost.