The Centre Cannot Hold?

Everyone knows about the return of extremist politics as a result of austerity in Greece. (Paul Mason’s reporting has been particularly strong over the last few years.) The link between economic depression and far right extremism in the 1930s is also well documented. Yet I suspect there is a tendency to assume that this kind of thing only happens in ‘immature’ democracies.  This assumption is wrong, as both the Netherlands and the UK currently show.

The Netherlands has been run by a parliament since at least 1848. Coalitions are the norm rather than the exception, and there is a general desire to achieve consensus on important political issues. Before the formation of the Euro, the extreme right in the Netherlands could be described (pdf) as marginal, which was not the case in France for example. Yet recent opinion polls suggest that if elections were held now, the far right Freedom Party would become the largest party in parliament. The left wing Socialists have also been taking support away from the centre-left Labour Party. What the two extreme parties have in common compared to the mainstream is opposition to further fiscal austerity.

So far, there has been a depressing consensus among the more centrist political parties in the Netherlands that they need to follow the Eurozone’s fiscal rules.  The economy is in recession: GDP fell by 1% in 2012, and will probably fall by a similar amount this year.  Unemployment is rising: the Chart below shows OECD forecasts and also OECD estimates of the output gap. Of course this has increased the budget deficit, and so we have had a series of austerity measures in an attempt to keep the deficit at 3% of GDP to stay within the Eurozone’s fiscal rules. [1] When the Freedom Party, which was part of a right wing coalition, refused to support these cuts in 2012, they were passed by a coalition of the centre, egged on by the European Commission.

OECD Economic Outlook Estimates for the Netherlands

Of course the Netherlands, unlike Greece or Ireland or Portugal, has no problem funding its budget deficits, so here austerity is very much a political choice. Recent polls suggest the public has had enough, and that as a result support for the Euro itself is suffering. The union movement has been active in its opposition, but more recently prominent business organisations have also begun to question austerity, although predictably their opposition has focused on tax increases rather than cuts to welfare.  Coen Teulings, who departed as head of the highly respected CPB in April, was vocal in his opposition to recent cuts, but the central bank has been much more supportive of austerity.

The UK has also seen the emergence of a politically successful far-right party: UKIP. This is also unusual from a historical perspective: since Oswald Mosley the UK has a proud tradition of resisting parties of the far right. UKIP’s popularity is not normally linked directly to austerity, but instead to widespread hostility to both immigration and the European Union. As a result, the Conservative Party has taken economically damaging positions on both issues in an attempt to reduce UKIP’s appeal. Chris Bertram at Crooked Timber recounts in detail the sorry state of the UK ‘debate’ on immigration. Yet the link between concerns about immigration on the one hand and unemployment and low wages on the other is fairly obvious. Despite all the valiant attempts by Jonathan Portes and others to focus on the evidence, this is one of those cases where the combination of tabloid media hype, partisan political advantage and ‘common sense’ normally wins, and as a result the UK Labour Party seems to spend much of its time trying to ape the Conservatives.

Why has support for the far-right grown in the UK and the Netherlands, while in France for example the far-right did not make a breakthrough in 2012? No doubt a complete answer would be quite complex. However it is worth noting that the UK and the Netherlands have both experienced sharp falls in real wages in the recent past. The OECD expects real compensation per employee to have declined by a total of about 4.5% in the three years 2011-13 in the Netherlands, and by about 5% in the UK. The decline in the Euro area as a whole has been much smaller, at less than 2%. In France real wages have increased a little in all three years. Figures recently calculated by the House of Commons library show a similar picture, with only Greece and Portugal doing as badly as the UK and Netherlands since mid-2010. [2]

In both the UK and the Netherlands we have recession and fiscal austerity, where the recession has been associated with marked falls in real wages as well as increases in unemployment. In both cases I would argue that there has been no effective opposition to fiscal austerity from the political centre, which helps encourage support for the political extremes. But that is probably as far as the similarity goes, because the position of the centre-left Labour Party in the two countries is very different.

In the UK the Labour Party is in opposition. It seems their general tactic on issues like austerity or immigration is not to question the underlying assumptions on which government policy is based. Perhaps the idea is to avoid being branded as irresponsible (austerity) or out of touch (immigration), while hoping to retain the support of those who do strongly oppose government policy. This position has so far been tenable partly because there is no strong party to the left of Labour. We may have to wait until 2015 to see if this strategy is successful.

The position of the Labour Party in the Netherlands is more immediately problematic. It is now part of the coalition enacting cuts.  The Socialist Party, which is to the left of Labour and which does not support austerity, has moved ahead of Labour in the polls. In April there was a ‘social accord’, where the unions and business groups signed up to the budget deal proposed by the government. Further cuts are now required beyond those agreed in April to meet the fiscal rules, and the unions (and perhaps business leaders) are now actively campaigning against austerity.  Yet it will be hard for the centre-right to ask Brussels for a reprieve, as their leader and Prime Minister, Mark Rutte, has followed Germany in taking a hard line on the 3% deficit limit and the Commission’s enforcement of it.  The reasons for Labour to back additional austerity are much less clear.

So in the Netherlands and elsewhere in Europe, on the issue of the stupidity of pro-cyclical fiscal policy, it is only the views of politicians on the far-left or far-right that matches those of the majority of macroeconomists.  Given the social, economic and political consequences of declining real wages and rising unemployment, which fiscal austerity only makes worse, this is both a very sad and rather dangerous state of affairs.

[1] Yes, this is the actual balance. The OECD estimate that the underlying primary deficit was 1.4% of GDP in 2012, will be 0.1% in 2013, and in surplus in 2014. I think those economists who suggested that the new Eurozone Fiscal Compact would be more enlightened than the old rules need to ask themselves why that has not happened. 

[2] Of course Germany has also avoided falls in real wages. In Germany there is a clear consensus among the parties of the centre for imposing austerity on others! While Merkel’s position is well known, Andrew Watt discusses here how the macroeconomic position of the centre-left SPD goes from bad to worse.