Why didn’t Europe fall apart?
Horace Vernet, “The Battle of the Barricades.” Public Domain. Source: Wikipedia
In 1848, revolution swept across Europe. Governments fell in Italy, France, Germany, Denmark, Hungary, Poland, and elsewhere. In all, over 50 countries were affected. The uprisings were led by shaky ad hoc coalitions of reformers, intellectuals, and workers, which didn’t hold together for very long. They were often violently put down, but resulted in lasting social changes, even if the political order was only temporarily overturned.
This history was on investors’ minds five years ago, as the European Union and Euro-zone were roiled by a series of economic setbacks and social pressures. Greece was on the verge of leaving the Euro. Portugal saw its largest bank fail. Southern Italy remained mired in economic stagnation. Folks saw the European periphery – nick-named the PIIGS, for Portugal, Ireland, Italy, Greece, and Spain – as teetering on the brink of economic collapse. Memories of the financial crisis of 2008-2009 were fresh on our minds.
But a funny thing happened on the way to revolution: it didn’t happen. A series of referenda and elections repeated showed that the majority of various electorates supported keeping Europe together. The biggest outlier was the United Kingdom, with its “Brexit” referendum, the details of which still need to be worked out. It turned out that the loudest critics of European integration – via the EU, the Euro, and other institutions – were still a small, if vocal, minority.
When people lose faith in their government, they’re far more likely to try alternative structures. That’s what has led to the rise of both left-wing and right-wing populist parties. Whether it’s economic and financial difficulties or crime or other social problems, if the government loses your trust, you look elsewhere. That’s why there’s a high correlation between lack of trust in the government and the rise of populism.
But these data and Europe’s history indicate that there is a limit to how far people will go. While populist parties have a definite appeal, especially for folks who have been marginalized by the current political order, upending the system has significant costs as well. And the current populist leaders have failed to present a convincing political case that they have a viable alternative.
The European crisis isn’t over. There are still financial imbalances and pressures that stem from their common currency, its decentralized structure, and the immigration wave coming out of the middle east. More transparency and accountability are needed. If Europe’s economy turns down again, it’s likely that the populist tide will rise. And memories of 1848 – and its ugly aftermath – will reemerge.
Douglas R. Tengdin, CFA