THE POPULIST HYDRA

THE POPULIST HYDRA Christopher Granville / Grace Fan

◼ Imminent election headlines, from Germany then the US, may not move markets ◼ But they signify deeply embedded political risk in DMs for years to come ◼ Trump 2.0 lessons point to risks increasing the longer populist power lasts ◼ Data centre rage in the US ominously jumps the firebreak of ideological polarization

Key judgments ▪ Upcoming elections and polling on both sides of the Atlantic prompt a reassessment of ‘populism’ as the core political risk in DMs.

▪ Headlines about election results, especially in the absence of clear market impacts – from regional government change in eastern Germany or gridlock in Washington – may create the deceptive impression that this risk factor is ephemeral.

▪ This risk is, on the contrary, perennial – founded on deep public disaffection with established political parties and incumbent governments.

▪ The live Trump 2.0 experience of populist rule has important lessons. Rather than reabsorbing protest into the political mainstream, backlashes against incumbent populists gravitate to new forces on the hard left or even harder right (a phenomenon recalling the monstrous Hydra of ancient Greek mythology).

▪ This is like a fire deep in the hold of the ship of state that may be contained but cannot be easily extinguished. Unquenchable protest can even jump over the firebreak of ideological polarization, as seen in the bipartisan populist rage against data centres in the US – while a potential European ‘pan-populist’ cause might be a pivot to Russia.

▪ Another Trump 2.0 lesson suggests that populists become further radicalized by retaining or regaining power. What happens after next year’s Italian election may be a revealing European test of this hypothesis even as headlines are grabbed by Marine Le Pen’s plausible presidential election victory in France.

▪ This European route to populist power – outsiders defeating the establishment – is harder than the alternative seen in the US of infiltrating established parties. This may mitigate one form of populist risk – namely, institutional degradation.

▪ But it offers no grounds for complacency about the other main populist risk related to specific policies – such as deporting immigrants or punitive wealth taxes that may arrive in the real world through the ‘Overton Window’ even if their original populist promoters are kept out of power.

Topical – but also perennial Now seems a good time to reassess risks linked to political ‘populism’ in major developed markets. A bullish Wall Street call on European equities earlier this month came with only a couple of caveats – the first to do with domestic funds flows while the other note of caution referred to “political headwinds looking out to 2027”. This sounds like a nod to Marine Le Pen now being the front-runner in next year's French presidential election. But such headwinds are set to gust strongly as early as next month – from Germany. The state election in Saxony Anhalt on 6 September may result in the hard-right populist Alternative for Germany (AfD), the country’s most popular party, winning real power for the first time. AfD is also poised to emerge as the largest party (though less likely to be in a position to govern) in the Mecklenburg-West Pomerania election two weeks later. In a sign of the times, AfD is even polling in the top three parties in liberal Berlin (also with elections on 20 September), as German Chancellor Merz’s approval rating has plunged to a new low (13%) this month.

AfD in pole position in Saxony-Anhalt election . . . . . . and Mecklenburg-West Pomerania election 2021 result Latest polls 2021 result Latest polls Mainstream Mainstream FDP FDP Greens Greens SPD SPD CDU CDU Populist Populist BSW (left) BSW (left) Linke (left) Linke (left) AfD (right) AfD (right) % vote share % vote share Source: PolitPro (19 August poll of pollls) Source: PolitPro (poll of polls, 19 August)

Limiting this discussion to Europe, however, would be “Hamlet without the prince” what with a full-throated populist government in power in the form of Trump 2.0. Unlike the European scene where populist election victories and their impact for now remain topics for…