Nationalists and Economic Growth: The Bad and the Good
Posted by hkarner - 3. März 2017
Source: The Wall Street Journal
Hungary and Poland prove nationalism need not hamper growth, at least in short run
The economic establishment has watched with growing alarm as a nationalist wave turned British voters against the European Union, swept Donald Trump into the White House, and now gives France’s anti-euro, anti-immigrant National Front a shot at the presidency.
Yet predictions that nationalist policies will upend markets and the economy oversimplify their complicated relationship with economics. On the one hand their opposition to free trade, immigration and foreign investment are all unfriendly to growth in the long run. Yet they often preside over expansionary budgets, easy monetary policy and lower currencies, all of which support growth in the short run.
Critics often note that in Latin America, left-wing populists such as Venezuela’s former president, Hugo Chávez, and Argentina’s Kirchner family ushered in inflation and ruin. Those examples may not be applicable today, at least immediately. In most developed economies inflation is too low, limiting the risk of more macroeconomic stimulus. Unlike Chávez-style socialists, today’s nationalists are generally pro-business, so long as that business is domestic, not foreign.
Mr. Trump neatly fits that mold. “We must restart the engine of the American economy, making it easier for companies to do business in the United States and much, much harder for companies to leave our country,” he told Congress Tuesday night. For business, the stick of protectionist tariffs has mattered less than the carrots of less regulation and lower taxes on profits. The budget deficit didn’t merit a mention, displaced by promises of “massive tax relief for the middle class,” “one of the largest increases in defense spending in American history” and more spending on infrastructure and veterans, all while leaving untouched Social Security and Medicare.
That is a recipe for bigger deficits, faster growth and, eventually, inflation. Yet bond markets still expect historically low interest rates almost indefinitely.
There’s already evidence that the new nationalism need not set back an economy. Since 2010, Hungary has been governed by the nationalist Fidesz party. Prime Minister Viktor Orban, a champion of the “illiberal state,” has clashed with the European Union for curbing the independence of the central bank and the courts. He has fought EU plans to resettle thousands of mostly Middle Eastern migrants while warning of Brussels bureaucrats becoming “the Soviets—that they want to decide instead of us who and how we want to coexist with.”
Since 2010, Hungary’s growth, at 1.6%, has slightly exceeded the EU average. Its unemployment rate, at 4.5%, is the EU’s third lowest. In part this is because Hungary, unlike France, didn’t join the euro, and has no plans to join. This allowed its currency to fall against the euro, underpinning exports and inflation, even as its interest rates followed the eurozone’s down. While the rest of Europe has been raising taxes and cutting spending to corral its debts, Hungary has, since 2012, eschewed austerity, allowing its structural budget deficit to expand with the help of generous transfers from the rest of the EU.
In pursuit of his nationalist agenda Mr. Orban has imposed taxes on banks and retailers and forced fee cuts by utilities, sectors with large foreign ownership, but his private sector interference has otherwise been modest. Critics accuse him of undermining Hungarian democracy and independent institutions such as the judiciary and the press. Unfortunately, what’s bad for democracy isn’t automatically bad for growth—just look at China.
Law & Justice, the nationalist party that formed the government in Poland in 2015, has followed a similar script, replacing judges and state media leaders and clashing with the EU over migrants. It has reversed increases in the pension retirement age, in effect worsening the country’s long-run debts. Yet like Hungary, Poland has benefited from a low currency and interest rates and an absence of austerity. Growth slowed last year but still led most of the EU as it has since 2008.
These trends offer clues to what may await France if Marine Le Pen, leader of the National Front, wins this spring’s presidential election. She wants to ditch the euro and allow the French central bank to finance government deficits, now prohibited by European treaties. That has sent French bond yields up sharply against Germany’s as Ms. Le Pen’s odds of winning, though still below 50%, have climbed.
If the transitional costs could be minimized (a big if), a return to the franc could be a boon. Since the euro’s introduction in 1999, Germany has made itself more competitive with labor market and tax reforms while France has gone in the opposite direction, resulting in a euro that is too high for France and too low for Germany. Returning to the franc would permit a devaluation large enough to wipe out this disadvantage. Along with ramped up deficit spending, that could spark a near-term boom, as Argentina experienced after abandoning its currency peg in 2002.
The rest of the National Front’s program is steeped in the “corporatism” that has long defined French capitalism: It calls for state intervention to ensure strategic industries remain in French hands, subsidized loans to small business, mandatory cuts in utility and other fees, and an end to recent laws that make it easier for businesses to fire and negotiate with workers.
If not truly socialist, these are hardly a market-friendly recipe for economic growth. The question hanging over the new nationalists isn’t whether they can deliver economic good times now, but whether anti-globalization policies can sustain prosperity in the long haul.