Think - AT LONDON BUSINESS SCHOOL

How business is responding to the rise in populism

Companies don’t usually get involved directly in politics. But, say Enrique de Diego and Simon Caulkin, that is now changing

Enrique-de-Diego---How-business-is-responding-to-the-rise-in-populism-974x296

Business has been growing alarmed at the rise of extremist political parties in Europe.

In Germany, the car manufacturer, Volkswagen, and, the steelmaker, Thyssenkrupp have urged their employees to reject right-wing populism, while Deutsche Telekom has warned of the “dramatic effect of the rise of new nationalism on the economies in Europe” and urged citizens to “fight for the freedom we have achieved.

As the Conservative UK government moves to the right to counter the appeal of the populist, anti-EU UKIP and Brexit Party, two-thirds of UK CEOs have expressed their concern at the growing resort to protectionism, as a survey of 1,300 top executives from KPMG shows.

Meanwhile, employers association Confederation of British Industry (CBI) warns that the country’s “long-held reputation as a stable, common-sense place to do business is being openly questioned”, with long-term consequences for both small companies currently doing business in the EU, and investment.

Polarisation of politics

Several factors have fuelled the rise of European nationalist and populist movements that tend, although not exclusively, to favour parties of the right. Among these are economic insecurity and unemployment following long periods of austerity after the global financial crisis of 2008; a widespread feeling among “left-behind” voters that traditional parties have failed them; and a consequent shift rightwards of established centre-right parties to prevent insurgent groupings from picking off too many of their voters, causing them to adopt more draconian and protectionist policies on immigration, trade and employment, for example. The UK and Brexit is a classic case in point.

Since centre-left parties are experiencing similar pressures to abandon the centre (as in both the US and UK), the result is a general polarisation of politics that has only been exacerbated by the use of social media to provoke and divide, often disseminating conspiracy theories and constantly playing on fear, whether religious (Islamophobia), nativist (Austria, Hungary, Poland) or economic (France, Italy).

‘Far-right populism is upending the consensus that has ruled for the past 40 years’

What’s at stake?

Uncertainty is the worst enemy for most (though not all) businesses and these political developments signal unwelcome instability.

With the rise of far-right parties, the national political landscape has fragmented, with parliaments becoming more atomised, probably leading to more heterogeneous government coalitions and increasing political volatility.

Policymaking will likely take longer and become more complex and contentious, with legislation delayed or halted. Examples include in Italy, where the unstable ruling grouping has fractured, and Belgium, where coalition-building, always difficult, has been complicated by the rise of the far-right Flemish VB party.

The European Union (EU) values might now be at stake. If these forces were to implement their electoral programmes throughout Europe, one might see restrictions to freedom of movement or reduced social and economic cohesion, as Italy’s Matteo Salvini has suggested revisiting.

At worst, the rise of these nationalist and populist movements is challenging the European project of economic and social integration that has been under construction for the past 60 years.

The EU has been built on ideals of democracy, inclusion and tolerance, which have ensured that moderate governments and policies have until now mostly been the norm.

‘Since centre-left parties are experiencing similar pressures to abandon the centre (as in both the US and UK), the result is a general polarisation of politics that has only been exacerbated by the use of social media to provoke and divide’

Specifically, the EU’s ‘four freedoms’ (free movement of goods, capital, services and labour), described as the ‘very essence’ of the project, have been enormously beneficial to business, reflected in transnational ‘just-in-time’ supply chains and rising levels of internal trade.

Intra-EU trade has been an engine of growth in the past two decades, increasing from €150 billion (£127.51 billion) to almost €300 billion over the past two decades.

But there are now ominous signs that Europe’s stable business ecosystem could be at risk if populist parties gain power and implement restrictive policies on sharing knowledge, innovation and entrepreneurial activity.

Business reacts to populism – more to come?

While the far right did not enter the European Parliament this year with the gains that some had predicted, despite the highest turnout in the last 20 years, its rise has already altered the political landscape. 

In the US, fear of the consequences of nationalist, anti-big-business sentiment, was instrumental in the recent decision by the Business Roundtable, a grouping of 181 of the most prominent American CEOs, to redefine the purposes of a corporation to serve the broad economy rather than just its shareholders.

As the US experience shows, a sea change is underway. Far-right populism is upending the consensus that has ruled for the past 40 years. In Europe, many business leaders are bracing themselves for a hurricane.

Enrique de Diego MBA2017 is a consultant at Bain & Co and an alumnus of London Business School’s MBA programme. This piece is his personal view and not representative of his employer.  

EU’s four freedoms - at risk from populism?

By Enrique de Diego MBA 2017







  • Free movement of goods.

    One of the first priorities when the Treaty of Rome was signed in 1957. The elimination of physical and technical barriers to trade is now taken for granted. The EU estimates that “the benefits arising from the principle of free movement of goods and related legislation amounts to €386 billion euros annually.”

  • Freedom of movement of labour.

    Also dating back to the 1950s, and also a pillar of EU integration. The aim is to allow the regional labour market to work more efficiently, permitting migration from lower-wage to higher-wage countries, and from those with a labour surplus to those with a shortage (often for demographic reasons). Allowing workers to raise their income by relocating to other countries within the union, it also - in theory - enables employers to access wider talent pools for higher-level posts.

    In fact, while immigration into EU countries is increasingly accounted for by internal EU mobility, and despite efforts to facilitate it, immigration in the EU remains low by international standards, according to Eurofound. Between 2008 and 2012, the share of EU mobile workers out of the total working population in the EU increased from 2.6% in 2008 to just 3% in 2012.

    The proportion is higher in some regions and some trades, like construction and hospitality, for example. Businesses are concerned about limitations in hiring the talent they please, and there are already voices claiming that “tighter regulations around visas, immigration and protectionist policies governing the sharing of knowledge and innovation could threaten global innovation.”

    The UK, again, stands as a warning, with immigration from the EU shrinking fast since the 2016 Brexit referendum.

  • Freedom of services.

    Gives the right to European citizens to provide services on a cross-border basis and is another cornerstone of the EU project. Services constitute two-thirds of the EU’s GDP and therefore play a crucial role in the bloc’s economy.

    With much of Europe suffering from an innovation deficit – just 37% of Europeans favour self-employment, compared with 51% in the US and China – any obstacles to cross-border knowledge-sharing, innovation or entrepreneurial activity in general as a consequence of a brake on other freedoms would be a handicap as the world economy slows.

    Launching a new business not only requires drafting a plan and getting investors on board but also tailoring the product or service to fast-changing markets and consumer demands. In this sense, entrepreneurs seek stable, flourishing business ecosystems in which their companies can thrive. Such stable ecosystems might be at risk if far-right parties gain power and implement restrictive policies towards sharing knowledge and innovation.

  • Free movement of capital.

    Gives European citizens the right to carry out financial transactions such as buying shares in non-domestic companies or purchasing real-estate in other than their home countries. Investors have historically appreciated the stability of the EU but are showing signs of concern about Italian parties, like the League and German parties not willing to pledge financial support to other countries. “I worry that our problems in Europe are political and not economic, and that makes the environment very uncertain,” says one portfolio manager. Another sign of the times: foreign direct investment (FDI) into the EU is on the decline and the appetite to invest in Europe has dropped to a seven-year low “because of a cocktail of economic and political uncertainty”, according to EY. For now far-right parties have minority parliamentary representation. What if they were to become a major force with seats in all countries and the European Parliament?

 

 

 

 

 

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