Politics

Can the EU solve its autocrat problem?

https://www.ft.com/content/eaabd394-7bbd-11e9-81d2-f785092ab560

Yes, it can. However, to do so, it must come to terms with some of its deepest internal conflicts, and it must show thought leadership in areas where too few energies have been directed and too little progress is showing currently.

Tomorrow (23 May), the European parliamentary elections will begin. 402m people are eligible to vote, taking place in a process that slowly influences the direction of 28 member States.

There is a widespread expectation that, despite a rise in the support for non-traditional parties, the cooperation between the Conservatives and the Socialists will maintain the leadership, as it has done in the last two elections, but in a wider working coalition.

Does this mean that the rise of populist, euro-scepticism and autocratic wave is fading? No, not at all, in our view. These trends feed on a broad-based malaise, which is one very real disease that Europe must address more forcefully if it wants to continue to prosper.

The deepening corporate balance sheet inequality, and the uneven competitive level playing field that comes with it, is the root of the problem, in our view.

By corporate balance sheet inequality, we mean the observation that there is a widening gap in the sizes, in financial terms, of small and medium companies (any entity with up to 249 employees), and large and super-large companies (known as titans: companies that have reached profit levels equivalent to the GDP of mid-high income countries, such as Hungary or Luxemburg). Titans are growing in numbers, getting bigger, and spanning sectors.

Having deep cash buffers enables large companies to profit from new market dynamics. Globalisation is one, as the larger the company, the greater the ability to extend its reach. Technology is another. Larger companies can create and sustain customer networks by leveraging advancements in internet capabilities, big data, and artificial intelligence.

These factors feed off one another. Globalisation creates new markets, the penetration of which technology makes easier. In reverse, technology creates new products that globalisation allows companies to scale. A third factor, low interest rates globally, makes the process cheaper, which means, in turn, faster than companies that have infinitely smaller financial capacity. Speed, in business, is often the factor that ultimately dictates life and death.

Combined, these factors tilt the playing field excessively in favour of those that are already successful, in our view.

Major repercussions for the economy and, thus, for politics

The stronger the titans get, the fewer profits are available at the smaller end of the balance sheet spectrum. The risk of this is at least three-fold: less investment, less employment (or less prosperous employment), and less economic diversity.

Our research shows that this is behind the electoral shift towards right-wing parties. This is the case for multiple reasons. Faced with less benign financial conditions, voters go right in the hope that lower taxation will change the situation. (Alas, it will not, because any corporate tax cut or social contribution reduction exponentially helps those that are already big more.) Faced with growing uncertainty about personal well-being, some turn to the more inward-looking rhetoric of right-wing parties. Compounding the problem is that, when faced with complexity and danger, human nature seeks a strong convincing leader to take an effective direction. This affects the popularity of the European Union indirectly, which is perceived to be fragmented, slow and unfair.

Can the EU preserve its status of economic prosperity, democratic institutions and intellectual creativity? Yes, but to do so, it must rethink the policies that support these pillars. It must nourish genuine competition across the entrepreneurial field. It must debate and protect the principles behind the true democratic strength of the rule of law, not attempt to create short cuts clumsily camouflaged as rule of law directives. It must rethink its fiscal framework to support genuinely forward-looking economic policies that are adequate for today’s business cycle length: 10-14 years; not three years, as it was in the 1970s.

You cannot run a country effectively and fairly on the basis of the economic model of 50 years ago: if Europe is to remain a global leader, it is time to adapt its institutions to today’s reality.

Non-traditional parties understand this, and that is why they are winning the race.