Over the past couple of years, the Brexit vote and the U.S. Presidential election results suggested that a wave of populism was sweeping Western democracies. When populist candidates failed to prevail in several European elections, some of these fears eased.
But what’s wrong with populism? In fact, populist economic policies can boost economic growth and the capital markets in the short term. Where lies the rub then? In that they can create uncertainty and volatility. Populists’ disdain for checks and balances threatens to weaken pluralist democracies and their predilection for facile solutions rarely results in sound policies. This can be bad for long-term growth.
Populists also tend to have a destabilizing effect on domestic politics. They often don’t believe in pluralism, instead portraying themselves as the only legitimate ‘voice of the people’. This causes disruption, while the arrival of political newcomers can make forming viable coalition governments more difficult, as we’ve seen in Germany, Spain, the Netherlands and elsewhere.
Several underlying trends – rising economic inequality, deepening division in values, diminishing trust and the declining appeal of mainstream parties – suggest that politics in Western democracies will remain in a state of flux. Disruptive digitalization and the role that the Internet and social media are playing in politics could further destabilize Western democracies in the years to come.
As key members of any country’s economic landscape, companies must protect themselves from risks that could arise from sudden political and legal changes. However, traditional risk mitigation models may well fall short and a new way of thinking is required.