From the cacophony of populism, is a stronger middle emerging?

  • Voters have started to head away from the extremes back to the center
  • Voters seem to be seeking politicians who offer pragmatic solutions to the complex problems of the day
  • The political models we are heading for are thus more likely going to be various forms of, more or less, liberal social democracy
Donald Trump listens to the crowd cheer during a campaign event in Des Moines, Iowa.
Mark Kauzlarich | Bloomberg | Getty Images
Donald Trump listens to the crowd cheer during a campaign event in Des Moines, Iowa.

Recent election results suggest that right as well as left-wing populism may be more contained than feared and that the "reasonable middle" is reasserting itself in politics.

Political risks to financial markets may be receding, but hopes for a wave of liberalizing reforms are likely to be misplaced.

In 1989, as the Cold War was ending, Francis Fukuyama published his often-cited essay (and later book) proclaiming the "end of history" or, as he predicted more explicitly, the "unabashed victory of economic and political liberalism."

The following decade appeared to corroborate his thesis, as Eastern Europe and Russia transitioned peacefully toward Western democracy, China entered the system of free trade, financial liberalization deepened and unfettered globalization seemed to become an unstoppable force.

The excesses of the financial boom – arguably caused by too great a belief in the self-correcting mechanisms of free markets – ended in the deepest financial crisis and recession of the post-World War II period. In its wake, what had looked like a deeply unifying and growth-enhancing change in monetary regime in Europe came close to collapse and to tearing apart the European Union (EU).

Meanwhile, enlightened liberal democracy in Russia and Central Europe was challenged by forces of various kinds, further increasing tensions within the EU and with its big neighbor to the East.

Angry societies

Finally, the wave of refugees fleeing the wars in Syria and Afghanistan and the misery in parts of Africa heightened political tensions within and among European states and – arguably – contributed to the Brexit shock. Fears of "mass immigration" contributed to the election of Donald Trump to the U.S. presidency and a vote in Switzerland threatening its open borders with the EU.

Fukuyama's unabashed victory of economic and political liberalism, it seemed, was on the verge of being turned on its head. Instead, "angry societies" – one of the "supertrends" we recently identified – seemed to become a far more accurate description of the current drivers of politics in the West. Indeed, it is hard to deny that much of the political discourse – so far as it still exists – is characterized by anger, with potentially deleterious economic policy outcomes.

Renewal and progress

One would presume that anger breeds irrationality, radicalism and political as well as economic instability. But it need not. Anger – or let us call it, less dramatically, dissatisfaction with current affairs – can also lead to renewal and progress.

Indeed, this year's elections in Europe suggest that voters are rather heading in that direction, i.e. seeking greater stability as well as reform while rejecting angry populism which has no real solutions to offer for today's major issues.

With this in mind, it should thus come as no surprise that the radical right was soundly defeated in Austria, the Netherlands and France, and that the AfD (Alternative for Germany) is in rapid decline in Germany. In Finland, the radical right has just split into two, pragmatists and "purists." In Italy, too, recent local elections suggest that populist promises alone do not convince the electorate. Similarly, the setbacks for the Conservatives in the U.K. election in part represented a rejection of simplistic chauvinistic slogans.

Leftist populism in demise?

Conversely, we see few signs that the radical left is benefiting from this trend. Those who believe that the gains of the Labour party in the U.K. – headed by a rather dogmatic old-style socialist – suggest that leftist populists stand a good chance to govern are likely to be disappointed.

Quite to the contrary, even in countries that have suffered deep crises – Spain and Greece come to mind – voters have become disillusioned with their recipes. Bernie Sanders would not, we believe, have won the U.S. election had he been the Democratic opponent of Donald Trump.

Returning to what looks like a detail of the U.K. election, the very strong performance of the Conservative leader in Scotland, Ruth Davidson, an avowed "(EU) remainer" and opponent of the Scottish National Party suggests that separatism, another form of "anger," may also be on the way out.

The outcome of the Catalan vote in the fall, should it take place, will be a further test of this thesis. Finally, beyond Europe, recent political shifts in Argentina and the upheaval in Brazil also suggest that leftist populism is in demise. Let us hope that Venezuela will soon be able to rid itself of one of its more extreme forms.

Return to the center

Putting these observations together suggests to me that voters have in fact started to head away from the extremes back to the center. Emmanuel Macron won the French election on an openly centrist platform. The state elections in Germany recently boosted Angela Merkel's centrist CDU, but even if the SPD and Martin Schulz were to win in September, this would hardly signal a turn of the electorate in a radical direction.

Voters seem to be seeking politicians who offer pragmatic solutions to the complex problems of the day rather than simplistic recipes. The next U.S. president, I dare predict, is quite likely to be an avowed centrist as well. Maybe the disillusionment with radicalism – in this case of a truly brutal nature – will even strengthen forces of compromise in the Middle East at some point in the not-too-distant future.

All in all, fears of significant political destabilization and systemic disruptions thus seem overdone, which may be one reason why markets, equities in particular, have been so stable and calm until recently despite rather stretched valuations. Does this mean that we will, after all, experience the unabashed victory of economic and political liberalism that Francis Fukuyama proclaimed? This remains rather unlikely, in my view, for three reasons: First, our multipolar world suggests that national and regional interests will take precedence over those promoting free markets and unfettered globalization. Second, distrust of market solutions has not been overcome, not least due to the "misdeeds" during the financial crisis.

Third, aging societies (the "silver economy") are unlikely to turn toward significant liberalization and reform, not least given that many of the key economic problems of the day would require a reallocation of resources between the older and the younger generations. The political models we are heading for are thus more likely going to be various forms of, more or less, liberal social democracy. From an investor point of view, these are certainly much preferred to either right or leftist forms of radical populism. At the same time, hopes for vigorous liberalizing reforms are probably misplaced.

Michael Strobaek is the global chief investment officer at Credit Suisse.

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