- The New Rules with Alan Pentz
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Welcome back to The New Rules
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Last week I wrote about some trends I’m seeing in US politics including the rise of the tech bros in government, the emergence of influencer-led coalitions, and the continuing division but healthy de-polarization of the electorate. I ended on a positive note pointing out that while US politics may be messy, it is more vibrant and responsive to public needs than it has been in a long time.
I see things playing out differently in Europe. While the political trends are similar, I think the results will be far more positive for the US than the EU.
Similar Political Trends
In the wake of the pandemic and the resulting inflation, we are seeing the re-emergence of populist parties and candidates in Europe mirroring Trump’s comeback in the US. As the Wall Street Journal wrote in an excellent piece yesterday:
This past year showed that the progressive politics that dominated most industrialized countries over the past two decades or more is shifting to the right, fueled by working-class anxieties over the economy and immigration, and growing fatigue with issues from climate change to identity politics.
The return of Donald Trump to the White House is the most dramatic and important example—but it is far from the only one.
Across Europe, where economic growth has largely stalled, conservatives and populist right-wing parties are making unprecedented gains. Three-quarters of governments in the European Union are either led by a right-of-center party or are ruled by a coalition that includes at least one.
The latest populist wave started with the election of Italian Prime Minister, Giorgia Meloni, in October 2022.
That opened the flood gates. A populist right government won in Finland in 2023. Soon after the populist right VVD Party won a plurality in the Netherlands under Geert Wilders. This year a populist right party won in the Czech Republic, joined the ruling coalition in Croatia, and Austria’s Freedom Party won a plurality there for the first time.
The real show stoppers came in the two central members of the EU. In Germany, the populist right party, Alternative for Germany (AfD), won a third of the vote in the Eastern state of Thuringia marking the first time this kind of party would control a German state since World War 2. It came in second in Saxony. With a national election on the way in February, you can see in the chart below that the AfD is now in second place behind the traditional conservative CDU Party having surpassed the ruling center left SPD Party.
In France, President Macron’s snap election earlier in the year led to unprecedented gains for Marine Le Pen’s populist National Rally (RN) party. These were blunted a bit when Macron’s party collaborated with the left wing alliance to deny RN dozens of seats in the second round of voting. Macron has vowed to keep RN out of government. Still RN is the largest single party in the Parliament and Macron is now trying desperately to keep things on track until the next Presidential election in 2027-an election Le Pen is possibly favored to win.
The UK was the exception to this trend. The Conservative government that had ruled for 14 years lost badly in this year’s election. In my view this is because the Party turned its back on the Brexit voters that put them over the top in the 2019 election. The then leader of the Brexit Party, Nigel Farage, did a version of the France move and collaborated with the Conservatives to win them an historic majority. But after seeing the Party revert to its traditional centrism, Farage formed the Reform Party for the 2024 election. By not collaborating this time, Farage split the vote three ways and in Britain’s first past the post system, that meant the left of center Labour Party scored a huge win in July of this year.
This was really a vote against the Conservatives because, as you can see from the chart above, Labour’s support has cratered in just 6 months. Reform is beginning to move towards parity with the Conservatives and Labour. It’s possible it will be the official opposition party soon.
Overall we’ve seen a distinct shift to the right and towards populism across the West. Similar trends are driving this shift but I think the results will be much different in Europe versus the US. But first, what do these shifts have in common?
What’s Driving the Rightward Move?
In my view, we are seeing the inevitable consequences of the new rules that this newsletter was named for.
The world is shifting. The rules that shaped the Cold War and its immediate aftermath aren’t working anymore. The economic system fueled by free trade has been shattered by the rise of China and its chronic overproduction. The security system in which the US acted as the guarantor of security and peace is breaking down under US disinterest, stretched resources, and new priorities in countering China.
The aging of most societies is leading to more conservatism and a focus on preservation rather than growth. Most countries also face large debt burdens right as their populations begin to age making those burdens worse and in many cases unsustainable. Add in some AI, climate change, immigration, and few other things and you get a sense of a profound shift.
People don’t like instability and when they experience it, they search for solutions that promise to make it go away. It’s also at these times that elites fail. They were trained and incentivized on the old rules. It takes a fracturing of their world view for them to accept that things have changed. To some extent that is happening now but they continue to fight it.
That’s why you see populism emerging. Protected as they are by wealth and privilege, the establishment elites are the last to know that things are changing and they have the most incentive to ignore that change.
Where’s the Left?
Most of this change has been driven by the right so where is the left?
As the Wall Street Journal article above points out, the center left solution has been to focus on preserving the decaying system while focusing on concerns such as the green agenda and identity politics. This agenda emphasizes universalist goals over national ones and has failed to satisfy voters as a result. The left agenda has mostly focused on sacrificing now for the greater good of others or posterity. Voters don’t want don’t want to sacrifice. They don’t want green transitions. They want stability.
The other failure of the center and the left has been in trying to preserve the current system by denying power to the populists. There was a hope in the US that the center and left could beat Trump and “go back to normal.” In the EU we’ve seen election after election where the only focus was on keeping the populist right out of power. That required the center and center left to sublimate their own goals for the “greater good.”
This leads to unsustainable policies and governments. Witness Macron’s inability to pass a budget and field a sustainable government in France. Does anyone seriously think Macron has a viable path forward to a real future for France? It just feels like a holding pattern until the 2027 presidential election.
In Germany, the CDU will mostly likely form a coalition with the currently ruling left of center SPD party and continue on with some version of Germany’s current policies. It’s just more of the same.
What Is the Answer?
The path forward isn’t in simply handing the populist right power. It’s in collaborating with them and in co-opting their agenda. By co-opting their agenda you can satisfy voters while blunting the populist right’s most harmful policies.
This what we saw initially in Britain that eventually failed and now in the US with Trump’s re-election. In 2019 in Britain we saw a masterful co-opting of the issues of the Brexit Party by the traditional conservatives. This was architected by the political consultant Dominic Cummings who recruited Boris Johnson to implement the strategy.
The Conservatives won a huge majority to implement Cummings and Johnson’s vision. That led to Britain leaving the EU but once in power, Johnson promptly dropped the other elements of the agenda and fired Cummings. Immigration spiked. The investment campaign meant to spur growth in the forgotten parts of Britain (leveling up) faltered and the party lost its majority as quickly and surely as it achieved it.
A similar patterned played out in the US. Trump’s initial win was blunted by resistance from the rest of the political spectrum. That led to a Biden win where the focus turned to climate change and identity politics. These policies in turn were rejected and now Trump has been returned to power with a party designed more in his own image.
In the end, the answer is to reject the dead policies of the old rules and the warmed over universalist policies currently on offer from the center and center left. We need to look to the type of agenda Cummings proposed post Brexit where the focus was on controlling immigration and the impacts of our unbalanced international trade system.
The goal is to co-opt the core elements of the populist right agenda: protecting and investing in the areas worst hit by the free trade agenda, focusing on rebalancing the trade system, and controlling immigration.
There’s nothing inherently right wing about these positions. Many of them were at the center of Bernie Sanders run in 2016. I don’t like all of these policies but I think a successful political coalition has to deal with them.
For example, I’m personally very pro-immigration but being practical I have to recognize that unfettered open borders is a losing issue. A winning agenda is going to have to work out how to preserve the most important aspects of immigration while assuring the populace that you are in control of your borders.
Why It’s Different In Europe
I’m far more positive about the prospects of the US making progress on these issues than I am in Europe’s ability to do the same. Returning Trump to power showed that the US system is flexible enough to adapt. I see the traditional Republican Party co-opting Trump just as Cummings co-opted the Brexit Party. At the same time Trump is co-opting the Republicans. They’ll work it out somewhere in the middle.
In contrast, the ongoing rear guard action against the populist right in Europe means its politics aren’t adapting. I see several more years of paralysis in France and Germany. It’s true that a few minor European countries have populist right governments but, with the exception of Italy, none of them are at the core of Europe. Even in the Netherlands, Geert Wilders had to step aside to allow an independent politician to assume the role of Prime Minister with another member of his party as deputy.
However, I believe that populism will eventually break through in even France and Germany but the results will be unsatisfying. Europe just has a lot less flexibility than the US.
As I’ve written about before, in general the EU suffers from six main problems:
No tech sector: This is the growth engine of the future and the EU has missed each boat that’s come by. First the Internet, then social, then the cloud, and now AI. How can you grow without embracing what’s growing?
Over-regulation: The EU loves regulation and even takes pride that it could be the regulatory of the world. As a said in a previous post, specializing in regulation is like specializing in murdering puppies.
Depopulation: The Total Fertility Rate of the EU is 1.43 births per woman. You need 2.1 to keep a stable population. While not as bad as the catastrophic figures in East Asia, the EU is shrinking.
Anti-immigration: Anti-immigration works ok if you have a decent birth rate. The only real hope for the EU of keeping a population that can support itself is through immigration and these societies do not integrate immigrants well.
Debt: Most EU economies are heavily in debt with the exception of Germany. With generous welfare states and increasingly aging societies, the math isn’t adding up. Combine that with the other trends I’ve listed and you have a toxic cocktail.
The Euro: The Euro itself is an economic straight jacket that prevents the more highly indebted economies from inflating away their debts. Between Germany’s aversion to debt and France’s love for it, it seems like the Euro has become more a suicide pact than a currency.
These problems mean that Europe will have much less room to adapt. It can’t tax its people more to pay for its welfare state. It can’t absorb immigrants to make up for declining fertility rates. It’s locked in the Euro straight jacket that prevents the adjustments necessary to keep debt burdens manageable and the state at the core of its economy, Germany, is dangerously unbalanced and unsuited to a world with more trade restrictions.
In the US, I think the populist surge can have better results. By shifting the trading system to force a rebalancing, the US can bring more manufacturing home improving job prospects and wages as it does so.
As a leader in multiple of the industries of the future, additional investment in the US will mean more growth. I also think the US remains more amenable to immigration in the long term. We tend to go through cycles of opposition and then support for immigration.
I don’t know what the end state for Europe will be. When the populists get control in another few years, we’ll probably see some attempts to ditch the Euro and loosen the ties that bind the EU. That will help. However, I think we are going to see a Europe that gets slowly poorer and older, unable to adapt to the new rules. I wish I could see a more sustainable path but it eludes me.
Keep learning,
Alan
P.S.
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