The revenge of globalisation’s losers

24/4/2016

By Wolfgang Munchau

Its failure in the west is down to democracies’ inability to cope with the economic shocks

Globalisation is failing in advanced western countries, where a process once hailed for delivering universal benefit now faces a political backlash. Why? The establishment view, in Europe at least, is that states have neglected to forge the economic reforms necessary to make us more competitive globally.

I would like to offer an alternative view. The failure of globalisation in the west is in fact down to democracies failure to cope with the economic shocks that inevitably result from globalisation, such as the stagnation of real average incomes for two decades. Another shock has been the global financial crisis — a consequence of globalisation — and its permanent impact on long-term economic growth.

In large parts of Europe, the combination of globalisation and technical advance destroyed the old working class and is now challenging the skilled jobs of the lower middle class. So voters’ insurrection is neither shocking nor irrational. Why should French voters cheer labour market reforms if it could result in the loss of their jobs, with no hope of a new one?

Some reforms have worked, but ask yourself why. Germany’s acclaimed labour market reforms in 2003 succeeded in the short term because they raised the country’s cost competitiveness through lower wages relative to other advanced countries. The reforms produced a state of near full employment only because no other country did the same. If others had followed, there would have been no net gain.

The reforms had a big downside. They reduced relative prices in Germany and pushed up net exports in turn generating massive savings outflows, the deep cause of the imbalances that led to the eurozone crisis. Reforms such as these can hardly be the recipe for how advanced nations should address the problem of globalisation.

Nor is their any factual evidence that countries that have reformed are performing better or are more able to cope with a populist insurrection. The US and the UK have more liberal market structures than most of continental Europe. Yet the UK may be about to exit the EU; in the US the Republicans may be about to nominate an extreme populist as their presidential candidate. Finland leads all the competitiveness rankings but the economy is a non-recovering basket case — and it has a strong populist party. The economic impact of reforms is usually subtler than its advocates admit. And there is no straight connection between reforms and support for established political parties.

My diagnosis is that globalisation has overwhelmed western societies politically and technically. There is no way we can, or should, hide from it. But we have to manage the change. This means accepting that the optimal moment for the next trade agreement, or market liberalisation, may not be right now.

Over the weekend there were large protests in Germany against the Transatlantic Trade and Investment Partnership, an agreement between America and the EU. One of its more controversial aspects, is that it would reduce the legal sovereignty of its participants.

In the past two years, there has been a dramatic reversal of public opinion in Germany about the benefits of free global trade in general, and TTIP in particular. In 2014, almost 90 per cent of Germans were in favour of free trade, according to a YouGov poll. That has fallen to 56 per cent. The number of people who reject TTIP outright has risen from 25 per cent to 33 per cent over the same period of time. These numbers do not suggest that the EU should become protectionist. But the fast shift in those figures should serve as a warning signal to politicians to tread carefully.

I do not understand why Sigmar Gabriel, leader of Germany’s Social Democrats and economics minister, is such an ardent advocate of TTIP. If he is serious about stopping the erosion of support for his party, he should be more open-minded about the political costs of this agreement. It is hardly surprising that a large number of supporters of the anti-immigrant Alternative für Deutschland party are former SPD voters.

A no to TTIP would at least remove one factor behind the surge in anti-EU or anti-globalisation attitudes. The marginal economic benefits of the agreement are outweighed by the political consequences of its adoption.

What advocates of global market liberalisation should recognise is that both globalisation and European integration have produced losers. Both were supposed to produce a situation in which nobody should be worse off, while some might be better off.

That did not happen. We are close to the point where globalisation and membership of the eurozone in particular have damaged not only certain groups in society but entire nations. If the policymakers do not react to this, the voters surely will.

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