Brexit And The Rise of Populism The 2016 Mid-Year Geopolitical Outlook

(Due to the Independence Day holiday, our next edition will be published July 11.)

As is our custom, we update our geopolitical outlook for the remainder of the year as the first half comes to a close. This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international landscape for the rest of the year. It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward. They are listed in order of importance.

Issue #1: The Rise of Populism
As we noted in our 2016 Geopolitical Outlook published last December, middle class households across the developed world are being buffeted by deregulation and globalization. Middle class incomes have stagnated. In the U.S., middle class and working class households have tried to maintain their lifestyles through debt accumulation. The 2008 Financial Crisis effectively closed that avenue for keeping up appearances.
In Europe, similar economic conditions exist, which are exacerbated by a “North/South” divide, best exhibited by the Greek debt crisis. The refugee crisis in Europe is also triggering social and economic changes that are raising concerns about the social fabric of many European nations.
In the face of economic stagnation and social upheaval, many middle and working class Americans and Europeans see the political elites as detached and unconcerned about their welfare. The political elites are cosmopolitan and internationalists; we describe them as “Davos people,” the types that go to Switzerland every winter to talk about the importance of globalization, deregulation and the rapid introduction of new technology. These factors, while clearly bringing inflation under control, are blamed for undermining wage growth and causing income inequality.
In response to middle and working class unrest, there has been a surge in populism. In Europe, the most clear-cut example of the populist rise is Britain’s decision to exit the EU. However, this isn’t the only example. The National Front party in France scored major gains in regional elections last year, and only the combined efforts of the mainstream parties denied electoral success to the right-wing populist party. Its leader, Marine Le Pen, applauded Brexit. Both left-wing and right-wing anti-establishment parties have emerged in Greece. Right-wing populist parties have emerged in Denmark and Finland, namely, the Danish People’s Party and the True Finns Party, respectively. The leader of the Dutch Party for Freedom, Geert Wilders, immediately proposed a referendum in the Netherlands similar to the British vote. In Spain, Podemos has emerged as a left-wing populist party.
However, the most apparent expression of populism is evident in the improbable primary performances of Donald Trump and Sen. Bernie Sanders. Both were running as anti-trade, anti-bank, anti-superpower populists. The former projects a right-wing strain of populism, expressing a nativist position similar to right-wing parties in Europe. Sen. Sanders was a left-wing version of populism, calling for free health care and college education. He also promised a “revolution.”
The importance of this rising populism is that it leans against the establishment consensus of at least the past 25 years and, in many cases, the entire postwar period. This consensus supports globalization, deregulation and the rapid adoption of new technology with few regulatory restrictions. Those who have struggled in this policy environment are rebelling against the consensus. They want a less global world, one with job and trade protections, less immigration and, for the U.S., a renunciation of much of the superpower role.
The danger of this populism is that it will likely lead to a leaderless world characterized by regional trading blocs, which could involve fighting within each bloc as well as fighting with other blocs.1 A world without a military and financial hegemon is a dangerous one. A positive outcome from this threat would be a leadership that does not abandon the superpower role but successfully addresses the fears and instability that globalization and deregulation create for much of the developed world’s working class. If that policy mix cannot be found, the world could fall into a dark period.
The Rise Of Populism