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Populism and geopolitical risk: what investors and policy-makers need to know

In this Citigroup panel on populist politics and geopolitical risk held before the US elections, Catherine Fieschi, Counterpoint’s founding Director, answered some of the most pressing questions for policy-makers, investors and corporates. Prescient.

[Version française]

Is populism a crucial new form of political risk? Is there a danger of a geo-political domino effect? How should companies, investors and governments respond? Is there a risk of Marine Le Pen being elected? Or Donald Trump? What about Brexit, Grexit or Merkel-exit?  And what role does the economy play?  These are some of the crucial issues tackled below. 

Populist politics seems to be on the rise everywhere – is it a game changer?

Yes.  There is no doubt that we’re seeing a tectonic shift that can affect geo-politics as well as markets everywhere. We’ve been arguing for a while that the 21st century will be the century of populism.

What exactly are we talking about? Is this about Marine Le Pen or Donald Trump getting elected?

It’s tempting to put the question that way, but in fact whether or not either of them gets elected (and the chances are not slim), is almost irrelevant now: the damage is done.  Their politics and their potential voters have already shaped the debate and the political landscape. And they have done so in ways that make life and decision-making very difficult for governments – and therefore very unpredictable for investors.

And it’s about much more than Trump or Le Pen – it’s also about a whole host of movements and parties whose key characteristic is deep mistrust and anger of political elites.

So what is the nature of the risk for investors and businesses then?

The risk is stalemate and a power vacuum.  People often think that populism is about protest and mobilisation–with ‘things kicking off’.  That’s in part true, but the real risk is the uncertainty that these forces create, and their impact on governments and on states.  What markets and investors should worry about is things grinding to a halt.

We’ve written about this elsewhere, but to give an example, what should worry us is the fact that France is becoming unable to act in Europe, unable to shoulder its political responsibilities as an economic, political and military power because its mainstream politicians are held to ransom by Marine Le Pen and her potential voters.  Our work in France suggests that the ‘Le Pen threat’ looms extremely large. Ditto for Cameron whose referendum on Brexit – almost regardless of the outcome – is a massive own goal that resulted from all sorts of populist pressures including the threat of UKIP. This is a huge power vacuum at the heart of Europe.

And if we think of the US, as a response to the new strategic realities emerging in Europe, Obama has decided to quadruple defence spending in Europe – what’s to happen to that decision should populism continue to take its toll in the US?

How does this compare with what is happening in the United States?

The United states are no strangers to this sort of politics (from George Wallace to the Tea-party, from McCarthy to Pat Buchanan) and we now have Trump who has already taken a massive toll on the Republican race, obliterated a viable candidate, and plunged the party into crisis.  What all these populist movements in the US, but also in Europe, in Latin America share is their deep resentment toward elites – of all kinds.  What all of our research shows is that this about a very deep sense of betrayal on behalf of citizens, everywhere.  A perception that their governments – of whatever political colour – and the global financial elite has sold them out.  And, that the two are in cahoots. These voters and citizens who choose to support populist parties and movements (be they large or small, right wing or left wing, organized or disorganized) don’t trust governments and they trust banks and the media even less.  And they are legion. In that respect, populism is the canary in the mine.  It’s an alert that a significant number of people are feeling desperate and betrayed.  And sometimes with good reason.

So this isn’t specifically a right-wing phenomenon?

No, not at all. And it’s a ‘double no’.  In the sense that not only do you find such populist parties and movements on both sides of the spectrum (think SYRIZA in Greece, Trump in the US, the anti-corruption protests in Brazil, or the Five Star Movement in Italy).  But, it’s also worth noting that they are attracting voters from both sides of the traditional political spectrum (Marine Le Pen has pretty much captured the regional bastions of the Left in France).  Their argument is it doesn’t matter whether your current leaders purport to be on the right or on the left, in fact they’re all the same: they’re in it for themselves and don’t care about you. So you should just join us because we’re not involved in the petty right/left argument, we’re about you.

This is one of the most challenging aspects of the trend – it breaks with the traditional party lines we had come to understand, and leave the mainstream struggling to understand the new preferences and demands of the electorate.

Is there a danger of a geo-political domino effect?

Yes. As the active powers who kept the ‘pax Americana’ stable become enmeshed in surviving their populist surges, they become weakened.  They behave like failed states, or at least weak states.  They become embroiled in referenda (see here for an analysis of referendum effects), prey to hung parliaments, government dead-locks, legislative vacuums and decision-making stalemate.  They become less and less able to manage crises (Merkel’s unfolding fate is a case in point).

There is no question that this is an incentive for other actors to behave assertively.   Think Russia. Think ISIL. With the UK and France flailing around in the heart of Europe, who’s going to stop them? The main consequence in geo-political terms is that populist politics end up emboldening rogue actors who can spot an opportunity to act, to ‘get away with’ poor international behaviour because of the low probability of retaliation.

This means that catastrophic events (terrorist attacks, or belligerent behaviour in military and trade terms for instance, or even the massive re-negotiation treaties Brexit-style) are a lot more likely because the fundamental balance of power has been upset.  That’s what investors need to worry about too, because, aside from the human and political toll, this is when markets around the world react.  We had a glimpse of this when Brexit seemed to loom larger following the announcement that Boris Johnson was joining the ‘Leave’ campaign—the pound hit a seven-year low.

Is this reversible? What if the economy improved?

Those are two separate questions; let’s start with the second one on the economy.  Firstly, in the US, the economy *has* improved – and it has made no difference so far.

Second, it’s really important to keep in mind if you want to understand where all this anger is coming from, that what makes these voters (and in Europe and the US they are largely drawn from the middle and lower middle income brackets) tick isn’t just a question of money.

We studied the people who we’d labelled the ‘Reluctant Radicals’ (those voters who are not in any way extremists, or even particularly radical, but are drawn to populist parties and movements) and while income plays a part, our research shows that it’s about a lot more than that—much more.  It’s a question of status, a sense of hope for their kids which isn’t about making a lot of money necessarily but about creating a society where their efforts are respected and rewarded.  What’s at work is also the perception of being a second-class citizens to newly arrived people, who haven’t ‘contributed’ and are ‘jumping the queue’.  Many of the voters who support the Marine Le Pens of this world are not just worried  about their living standards, they’re angry because they feel their interests and their views don’t count anymore.  This is often where the xenophobia comes in: they think they’re losing out to people who are benefiting from a system that’s cheating them, and, to add insult to injury (in their view) was created by an elite that is insulated from the consequences of its own choices. Economics do play a part, but it’s often more an issue of inequality, rather than absolute terms. So unless there is significant redistribution and/or job creation, an improving economy riddled with 0 hour contracts isn’t going to sway them at all.

What about the possibility of reversing this trend?

This is not a trend.  It’s a deep transformation of people’s political aspirations, a reaction to ‘broken government promises, a fundamental re-shaping of how people relate to institutions (across every political landscape) and of course the crystallising of a reaction regarding the impact of globalisation. It’s not going to go away!

Do you mean that globalisation has reached its limits? Or is going into reverse?

Globalisation has ‘happened’ – it cannot be undone.  But what can and will be called into question is the nature of the governance needed to ride out, or tame, its effects. Until a new deal, a new settlement emerges, the voters will crave protection from change and they won’t get it.  So they’ll continue to mobilise in various ways. And as long as this happens, state actors will be less able to act and react to other threats, and continue to create conditions for a re-design of the geo-political sphere.

What does the world look like through the lens of this new populist risk?

A key consequence of populist mobilisation is that the familiar has become unfamiliar.

For decision-makers, whatever the sector, the first noticeable aspect of this new landscape is the unpredictability of the people they thought they knew.  Parties whose positions you thought you could trust split and fragment as leaders are held to political ransom by new populist actors.  Business models come under fire from traditional consumers, or even their own employees. Rebellion may not be effective, but it is cheap.  Citizens and consumers become increasingly unreadable in their preferences, and unpredictable in their behaviour.

The pressures on the political and policy-making spheres has immediate consequences for other public actors: allies that go AWOL, partners that can no longer be counted upon.  And the general unravelling of trusted institutions as behaviour is increasingly shaped by the fear of domestic populist politics.  The state of the EU vis-à-vis the migrant crisis is a case in point.  For investors, populist pressures on policy-makers and politicians has meant a decision-making sphere that can no longer be counted upon either to act as expected, or even to act at all. Everything form Labour market reform, to sustainable energy transitions, to the free movement of people is both up-for-grabs and hopelessly slow.  As the wheels of decision-making grind to a halt so does the cost of hedging one’s bets

For both public and private actors the public has become a riddle.

So how do we deal with it?

First crack the new codes that have currency in ordinary people’s lives—this is about identifying the new voices, the new actors, and the weak signals that inform this mobilisation.

Not for the first time – but perhaps for the first time on this scale – it’s pretty obvious that geo-politics and markets are going to be affected by what Counterpoint calls the ‘hidden wiring’.  It means that we need to pay attention to the impact of new variables (cultural, social) on political risk and on security.  What we call ‘cultural risk’: the collision between collective and personal emotions, frustrations, and preferences with the globalised means of protest and organisation provided by social media.  This doesn’t just imply scale – though that’s an important point.  But perhaps more crucially, it implies unprecedented unpredictability; The potential, as we know, for contagion and for things to change, for trends to emerge, reputations to fall, popularity to rise, globally, very fast.

In the longer term, political term, this is about adaptation and radical institutional transformation.  But in the meantime how can governments, businesses and investor weather the storm?

It all falls under the heading ‘using a different kind of intelligence’:

  1. Knowing who to talk to – and they may neither be in boardrooms nor in cabinets, but online, in squares or in yurts. Do you have the right networks? are you picking up on the conversations that are going to snow-ball into something bigger?
  2. Polls, surveys, superficial tick-box exercises are no longer enough for this kind of intelligence. Keeping a step ahead will mean being plugged into our societies in much deeper ways and asking different questions.
  3. This means developing new tools and indicators that can really take into account some of our current blind-spots—about behaviour, relationships, emotions, fluctuating opinions and habits. The things that are normally invisible, but are profoundly shaping and triggering the mobilisation we’re seeing.
  4. Big data is not enough – it’s about ‘fine’ data and knowing how to interpret it in context. In a world in which information circulates at such speed and groups form and dissolve quickly, you need to be ready to interpret data often and with a powerful lens.  What meant something yesterday may mean something different tomorrow.  Just as it may mean something entirely different across the world. Interpretation in context is key to keeping up and being prepared.

Armed with these new tools – there is the hope that we can re-engage with those who are ‘opting out’.  And if not bring them back in, then at least know where they’re headed. For investors and for governments this is the precious information they need to gauge the magnitude and the effects of the political disruptions (positive or negative) that are reshaping our world.

 

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