Relationships can be divided into four stages. First, there’s euphoria. This is when all a partner’s faults are forgiven, with the positives entirely outweighing the negatives. The second stage is early attachment. The euphoria has subsided, to be replaced with a state of contentment. Then, inevitably, comes crisis. Something changes drastically, creating a ‘make or break’ point. If – and only if – the crisis is successfully navigated, we get the deep attachment phase. That is when the relationship settles down for the long term.
As we enter 2019, the public’s relationship with populist politicians will shape the political backdrop for markets. We expect this relationship to follow the four-stage pattern. The euphoric stage played out from 2016 to 2018 as voters flocked to populist candidates and causes. This was partly a response to the economic pain that followed the global financial crisis. It also reflected long-simmering resentment of ‘elites’ and the effects of globalisation on living standards in the developed world. These problems are complex, but populist politicians put forward enticingly simple solutions. And a large part of the electorate lapped them up.
This euphoric catharsis manifested as a series of ballot-box shocks. We have also seen victories for Victor Orban in Hungary, Rodrigo Duterte in the Philippines, the Law & Justice Party in Poland and Jair Bolsonaro in Brazil. In the UK, the Leave campaign –the flagship policy of populist party UKIP – prevailed in the Brexit referendum. In the US, Donald Trump was elected president on a platform of trade protectionism and migration controls. And in Italy, the League and the Five Star Movement were able to form a coalition government this year.
Following these breakthroughs, the relationship between public and populists has entered various stages of the rose-tinted early-attachment phase. So far, the electorate has been getting what it voted for. In the US, Trump has made good on his offers of tax cuts and trade protectionism. In the UK, the Brexit process is underway, with departure from the European Union scheduled for March 2019. And the Italian government has embarked on both an expansionary fiscal policy and a programme of tax cuts.
But in 2019, we are likely to enter the crisis stage as the reality of those policies begin to bite. Elected populists will have to contend with the practicalities of government, potentially against a weaker economic backdrop. In the US, Democrat control of the House of Representatives threatens constant investigation of the president’s affairs and complete stasis in domestic policy. To wrest back control of the news cycle, Trump will have to up the ante with eye-catching measures, such as even more aggressive trade policies. These are likely to hurt his most loyal supporters where it hurts: their wallets
In Italy, the new government will have to face the reality of governing in a coalition of two very different parties. It must also attempt to make its fiscal plan function without destroying Italy’s ability to service its debt. Clashes with the EU and the impact on Italian yields are likely to challenge this coalition, with another election or full blown Eurozone crisis always just around the corner.
Meanwhile the UK will reach the crisis point as the post-Article 50 stages of Brexit begin to bite and the country has to contend with whatever deal is or is not reached. That will expose the impracticality of some Brexit populists who have simultaneously argued for independence from the EU and frictionless trade with it.
In short, populist politicians will be put to the test in 2019. This is likely to test voters in turn as populists attempt to build that deep attachment with unorthodox policy and strong language. Some populists may find that that a challenging economic or political environment works to their advantage: it gives them something to rail against. The key question is whether the challenges of 2019 cause voters to change course or deepen their attachment to these parties.
One thing to watch is how moderate politicians respond. Moderates in countries like Germany, the Netherlands and Sweden have already tilted towards populism to try to nip the appeal of the actual populists. Most would understandable prefer that populists fail under the weight of their own policies.
The underlying problem for all policymakers is that there are no simple solutions to deep-seated problems in the modern, globalised economy. In 2019, that reality is likely to become even more stark; the question is whether voters will stick by populist parties through the strife. In the meantime, markets are likely to continue to struggle to price in populism no matter what stage it is in.