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Politics, populism and power Politics, populism and power January 2019
Cover story
Politics, populism
and power
Many investors think of themselves
as apolitical, however, recent market
turbulence has reinforced just how
much politics can affect business and
finance. This issue of Konzept offers
incisive opinion on some pressing
political issues, including the trade
war between China and the US,
next year’s US presidential election,
European populism, technology
regulation, Brexit, and more. We also
examine how the latest developments
in artificial intelligence and machine
learning are helping investors forecast
the market impact of political events.
Konzept
Editorial It is hard to pinpoint Our second feature also looks to history as
many times in living memory a useful guide to show how the current tide of
when politics has consumed populism will change the economic landscape
more column inches, investor in many countries. Indeed, lessons from various
energy, and even dinner party revolutions and uprisings through history show
conversation than it does today. us that populism tends to be rooted in economic
That is why in this fifteenth edition of Konzept, despair for workers and eventually inspires
Deutsche Bank’s flagship research magazine, we fiscal expansion that puts upwards pressure on
assess some of the most pressing political issues inflation. Ironically, we argue that labour is on the
in 2019 and examine their impact on economies, verge of regaining some of its lost power due to
markets, and society. changing demographics and this could amplify
We start with the big picture, and examine the power workers are just beginning to enjoy.
the increasing number of countries using We then take a tour of the most politically
infrastructure projects as geopolitical tools. interesting countries in the world to see what
The US, Russia, China, and Europe are all 2019 has in store. In particular, we interview long-
intertwined in political brinksmanship with new time Washington insider Frank Kelly who gives
infrastructure for energy, transport, and security his candid his views on the chance of legislative
purposes. While these projects are often cost agreement, deficit spending, the 2020 presidential
ineffective, they operate as chess pieces, election, the relationship between President
sometimes blocking political channels of rival Trump and the Fed, and US trade policy. From the
countries, while opening channels elsewhere for other side of the fence, our Chief China Economist
future use. Interestingly, the use of infrastructure examines China’s changing foreign policy in light
in this way is not a new phenomenon and a look of the current trade war with the US.
through history helps us understand the motives In Europe, we consider what Germany will
and potential outcomes. look like in the post-Merkel era and, separately,Konzept
explore the chance of agreement on the nor is it linear. If investors can use AI to better
continent’s most crucial issues against the understand the market impact of political
backdrop of this year’s European elections, at events it will move political risk from being
which populists are predicted to do well. With one of the most subjective risks in investing to
the news on Brexit being extremely fluid at being a quantifiable input that portfolio and risk
present, we speculate on what an outsider might managers can objectively examine.
see when they tour a post-Brexit Europe and UK We hope this edition of Konzept gives you
in the future. some clarity on some of the most pressing,
Our final two pieces are anchored in changeable, and curious political issues we
technology. The first looks at the whirlwind year face in the world today. When we look back
technology groups endured in 2018 and explains on 2019 in years to come, it will be interesting
that political momentum on network neutrality to see whether we are truly living in a time of
and mergers and acquisitions could reshape exceptional political instability and fracturing
technology and media companies just as much or whether the intensity of today’s political
as new laws on data privacy. conversations will crescendo further in the
Our second technology-focussed years ahead.
piece shows how Deutsche Bank’s artificial
intelligence and machine learning platform,
Alpha-dig, can quantify geopolitical risk. For Jim Reid
investors, this is a giant leap forward. On Global Head of Fundamental Credit Strategy
average we find that following a significant and Thematic Research
political event, equities outperform bonds by
four percentage points over the following two
months. Importantly, this outperformance is
not the result of a sudden jump in markets,
o send feedback, or to contact any of the
T
authors, please get in touch via your usual
Deutsche Bank representative, or write to
the team at luke.templeman@db.comKonzept
Contents
06 Summaries
10 Infrastructure bypasses geopolitical choke points
14 What the history of populism can teach us today
20 Q&A on US politics
28 The trade war and China's foreign policies
34 Quantifying geopolitical risk
40 Germany in the post-Merkel era
46 Media, cable and satellite under the Trump administration
52 No end of history – Europe struggling in a changing world
56 CEEMEA: How the elections of 2019 will shape the region
62 A tour through post-Brexit Europe6 Konzept
Summaries
Konzept 15Konzept 15 summaries 7
Infrastructure bypasses geopolitical The trade war and China’s foreign policies
choke points Zhiwei Zhang
Peter Garber As trade talks between the US and China
Just as many infrastructure projects continue, it is notable that China has begun to
through history would never have been built if it invest considerable resources into its
wasn’t for political conflict, infrastructure is relationship with Europe, Japan, and other
again a key tool in geopolitics today. Indeed, countries. This is because although a bilateral
with the US increasingly secure in its oil supply, trade war is painful, it is much less painful than a
the oversight of the Straits of Hormuz is less multilateral one. Indeed, the exposure of China’s
necessary. Yet, Middle Eastern oil is still vital for industrial sector to the US is only five per cent
the EU, Japan, and China, and the latter has while exports to other countries are five times
responded by incorporating oil security into the higher. Against the backdrop of free trade
Belt and Road project. Meanwhile, concerns agreements with various countries, the long-
about relations with Russia, Ukraine, and some term solution appears to be the Belt and Road
Eastern European countries contributed to the initiative. However, the question of debt
Nordstream pipelines which deliberately bypass sustainability in the developing countries may
certain countries. Meanwhile, the annexation of cause projects to be reviewed.
Crimea led to the bridge across the Kerch Straits,
a project that has been mulled for a century. uantifying geopolitical risk
Q
Andy Moniz, Luke Templeman
hat the history of populism can teach
W Artificial intelligence has now grown to the
us today point that it can forecast some market effects of
Jim Reid, Henry Allen, Luke Templeman political events. Indeed, Deutsche Bank’s
Far from being unique events, waves of Alpha-Dig platform uses machine learning to
populism and social unrest have often occurred identify the extent of various political risks and
through history. As far back as the French then quantify their intensity. This result is then
Revolution, such episodes were regularly cross-referenced against markets. On average, in
associated with economic crisis, concerns over the two months after a key event, equities
national identity, and fundamental dissatisfaction outperform bonds by four percentage points,
at the governing class. We examine the lessons however, the return is not linear and
that previous periods of populism hold for today, understanding this is the key to a profitable
including themes of fiscal stimulus and investment strategy amidst political uncertainty.
protectionist economic policies. Looking forward,
as demographic trends boost workers’ bargaining ermany in the post-Merkel era
G
power and populists in government begin to Barbara Böttcher, Kevin Körner
establish a record they have to defend, some of Germany’s post-millennials will struggle to
the drivers of unrest should begin to subside. remember a time before Angela Merkel was
Chancellor. Following her announcement she
Q&A on US politics will not contest the next election, we examine
Peter Hooper with Frank Kelly what Merkel’s period in office has meant for
With the US facing a period of divided Germany and the implications moving forward.
government following the mid-term elections, we Although Merkel has been described as having a
interview Washington insider Frank Kelly to consensual approach to politics, many in
assess the implications. Frank gives his candid Germany were unhappy with her decisions
thoughts on the partial government shutdown during the sovereign debt and migration crises
and the chances of legislative success over the and say these decisions contributed to the
next two years as the Trump administration faces fragmentation within German politics that has
a Democratic-controlled House of made it even harder to build coalitions and reach
Representatives. He also discusses issues such a policy consensus. Given this domestic
as a possible infrastructure package and ongoing fragmentation, as well as the changing external
trade disputes. With the 2020 presidential environment, the next German chancellor may
election in sight, Frank considers how it may struggle to achieve the major reforms required
affect Washington over the new Congress. over the coming years.8 Konzept
Media, cable, and satellite under the Trump A tour through post-Brexit Europe
administration How will outsiders see Europe after Brexit?
Bryan Kraft In many cases, the continent will be home to
While 2018 turned out to be a humbling more populist parties emboldened by Brexit.
year for technology stocks, the biggest political Italy’s populist government is openly confronting
changes that affect the industry may be the the EU, factions in German politics is making
ones away from the spotlight. Changes to the dialogue difficult, right-wing groups in the
rules governing network neutrality and the Nordics have traction as they have in the
regulation of pricing have reduced uncertainty Netherlands. Across the continent, Brexit seems
for the industry and allowed for new pricing to have widened the ideological gap between
options. Separately, investors expecting more parties. Oddly, the opposite is true in Britain
lenient scrutiny of consolidation deals under itself. Rifts within parties themselves are in the
President Trump have been somewhat spotlight more than the rifts between them.
disappointed. Any changes to these rules could Meanwhile, populist parties lost votes at the last
have serious implications for an industry which election. Yet, with populism in Europe yet to
is currently grappling with privacy issues. reach peak levels, Britain's political paralysis
may spread to other countries.
No end of history – Europe struggling in a
changing world
Kevin Körner, Barbara Böttcher
As Europeans reflect on the thirty-year
anniversary of the fall of the Berlin Wall, they will
go to the ballot box in one of the most fizzing
parliamentary elections in memory. Yet, unlike in
1989, when liberal democracy and capitalism
were in the ascendant and the EU was
confidently expanding, the mood today is very
different. Current projections suggest
Eurosceptic forces will increase their influence in
parliament once again just as the EU has been
buffeted by a series of crises that have led some
to question its future. With the Trump
administration shifting towards an “America
First” stance, and China growing in power,
Europe has to nail down several issues or risk
losing its power on the world stage.
CEEMEA: How the elections of 2019 will
shape the region
Kubilay M. Ozturk
Several emerging countries go to the polls
this year, including Turkey, South Africa, and
Poland. As governments seek to boost their
election chances, there is the possibility that
some CEEMEA countries will loosen their fiscal
stance, while risks have increased that the
independence of their central banks could
come under pressure. Yet, if populists come to
power, or maintain it in some cases, the flip
side of illiberal control is that their influence
over the judiciary and bureaucracy means they
may actually find it easier to implement
economic reforms.Konzept 15 summaries 9
10 Konzept
Infrastructure bypasses
geopolitical choke points
Ever since the advent of steam power, The list of these projects in history is long.
grand infrastructure projects have dramatically Take the Suez Canal. Although built by French
reduced the cost of transportation, fostering the capital against British opposition, the canal
internal development of many countries. Yet, reduced Britain’s cost of maintaining naval
many such projects—canals, railroads, highways, dominance and empire on a multi-ocean scale.
ports, pipelines, and airports—included a Absorbing the lesson, the US reaped the same
geopolitical dimension that was an important or benefit with the Panama Canal. Meanwhile, the
even dominating impetus. Without this, many Trans-Siberian railway secured and populated
historical projects may never have been built and Russia’s Siberian frontiers and projected its
this still is true of many infrastructure projects power to the Russian Far East. The three US
under construction today. transcontinental railroads secured its Pacific
Indeed, following the end of the Cold War, coast to its Atlantic seaboard’s power centres and
the game of geopolitically driven infrastructure forced the construction of the Canadian-Pacific
construction to neutralise choke points has Railway, likewise to bind British Columbia to the
re-ignited. Some projects reflect competition Canadian Confederation. In Europe, the Berlin-
among great powers for influence in third Baghdad Railway aimed to secure a port on the
countries. Offers may be made of cheap Persian Gulf, gain access to oil, and circumvent
financing in places that are poisonous to private any potential constriction of the Suez Canal.
sector incentives. Some countries simply follow Looking forward, geopolitical tensions are
the old colonial business model of tapping currently driving a number of infrastructure
formerly inaccessible resources by finally projects and we will briefly examine how these
providing an outlet. link together.
These projects may have little commercial
rationale other than to provide an alternative Pipeline interplays with Belt and Road
route in case a key choke point is blocked in an As the US fracking revolution gathered
economic or even shooting war. In fact, the momentum, American crude oil production
project itself may deter such a blockage to the peaked at around 9.5m barrels per day in 2014.
main route. That they are built at all and at high However, Saudi efforts to boost pumping led to a
cost signals the probability that strategic price war. American drilling contracted and
planners today attach to conflict scenarios, or at existing wells were temporarily suspended,
least the seriousness of the tail risk. This must leading American production to fall to 8.5m
force investors to account for the same risks. barrels. A subsequent rebound in prices has
encouraged US crude producers who now pump
11.5m barrels per day. Much has come from the
Peter Garber continued development of the Bakken shales inInfrastructure bypasses geopolitical choke points 11
North Dakota but mostly from the Permian flow of oil. This mission of positive sea and
shales in West Texas and New Mexico. airspace control is far more difficult than would
Despite the flood of oil, much of the be a mission merely to interdict traffic through
production capacity already developed has been the straits, requiring ever-larger naval, air force,
locked away from the market because of a lack and army deployments and, potentially, war.
of pipeline capacity. That is where new pipelines However, as the US becomes a significant net
in the Permian and Bakken come in. Coming exporter over the next decade, its strategic
online over the next two years, they will allow the burden will shift from requiring the capacity to
movement to market of an additional 2m barrels exert positive sea control to only needing the
per day. In addition, the Keystone/XL pipeline capacity to exert sea denial through the straits,
will eventually unlock further oil flow from the Indian Ocean, and the South China Sea.
Alberta. US petroleum and gas supply will then Watching this shift closely will be Japan and
originate entirely in North America and the EU, which are still vitally dependent on Middle
significant net exports will be at hand. Eastern oil. Japan imports more than four-fifths of
This is a well-recognised geopolitical its crude from the Persian Gulf region. If the US
revolution. With no need for the US to import becomes a large exporter, it can insulate Japan
Middle Eastern or Venezuelan oil, the strategic and Korea to some degree. Indeed, the US could
imperative to defend long sea lanes for petroleum use exports from the prospective Arctic National
transport will evaporate, at least from a strictly Wildlife Refuge production, and its prospective
American perspective. pipeline, although ANWR is rated at only 750,000
Of course, the laying of these pipelines is a barrels per day, far less than Japan’s required
commercially profitable program per se but they imports of 4.5m.
carry profound geopolitical impact. It is
noteworthy that their construction was internally Belt/Road in the petroleum dimension
politically controversial. It was blocked under the With its economy growing to challenge that
Obama administration on environmental grounds of the US, China has increased its dependence on
and restored under the current administration that foreign oil. Indeed, China’s petroleum production
was more focused on the business and has now fallen below 5m barrels per day while its
geopolitical considerations. The spillover imports have risen to about 8m. More than half of
implications from this decision are considerable. these imports come from the Middle East. That
places China in roughly the same strategic
Persian Gulf commitments position as was the US after the late 1960s when
In the Middle East, the military and it was invested militarily in the Gulf region. So
geopolitical task of the US for six decades has now it will be China’s burden to secure petroleum
been to keep the Straits of Hormuz open to the transport from the region.12 Konzept
In part, China already does this via There is no need to take a position on
infrastructure. Pipeline deals have been made in whether this was, at the time, simply a hardnosed
central Asia, through Pakistan to the Arabian Sea commercial dispute between bilateral
and Iran, and through Myanmar. But it is of monopolists or a more serious geopolitical
particular interest that China secures dispute, although it certainly emerged as the
transportation to the Straits of Hormuz. Indeed, latter in 2014. The response of Russia and the EU
this is one of the essential geopolitical dimensions was to open Nordstream 1 in 2011, thereby
of the Belt-Road initiative; and it aligns with the subtracting an economic weapon from Ukraine
construction of potential bases in Myanmar, Sri and allowing the EU to adopt a neutral position in
Lanka, Pakistan, and through to Djibouti. further disputes. That signalled a cut in ties with
Ukraine while the EU has also launched a policy
Venezuela of diversifying its supplies away from Russia.
With waning dependence on foreign oil, it
has now become easier for the US to turn the The Crimean bridge
economic screws in Venezuela. This year, the This policy comes as the situation between
economic cost to the US of embargoing its Russia and Ukraine regarding Crimea becomes
750,000 barrels per day of Venezuelan imports increasingly complex. Since the annexation of the
will be far less burdensome. More damaging to peninsula in 2014, the impact on the region has
Venezuela, the door will also be open for the US proved economically costly. Tourism has dried up
to block the export of diluents which are vital for while Russia has suffered from the imposition of
the production of Venezuela’s produce and export international sanctions and the need to pick up
of its heavy crude to other potential markets. pension costs.
Collaterally, this can also turn into a stepped On top of the economic costs, infrastructure
up economic war against Cuba, which will now security has become a key focus. After the
likely receive fewer subsidies from Venezuela for annexation, Ukraine cut off the supply of water,
supplying President Maduro’s Praetorian guard. electricity, and transportation across the single
Existing Russian and Chinese geopolitical loans to land route to the peninsula, forcing Russia to use
Venezuela would then become even more more costly sea transportation. The completion of
problematic, so they would have to pay up to the Crimean Bridge across the Kerch Straits last
maintain this thorn on the flank of the US. year finally blunted these impacts.
Interestingly, although the bridge had long
Bridge and gas pipelines vs Ukraine been proposed, it was not launched until conflict
Concerns about Russian politics and cut the route across the Isthmus of Perekop. The
infrastructure are not just confined to oil. bridge seems also to have provided an easy
Indeed, Russia supplies about two-fifths of the means, or at least the signal, to block Ukrainian
EU’s gas imports, which it shipped via pipelines sea transportation via the Sea of Azov and the
through Poland and Ukraine before Nordstream Straits. It allowed Russia to implement
1 opened in 2011. Built on the Baltic Sea floor, burdensome inspections of Ukrainian sea traffic
Nordstream 1 was more costly than a land route through the Straits. By some estimates, this has
would have been but it, and the future reduced traffic by a quarter through the Ukrainian
Nordstream 2, bypass Ukraine and Poland. The port of Mariupol, itself under occasional attack
Nordstream 2 pipeline itself has been a point of during the conflict.
contention between different governments, If such blockages intensify, the effect will be
even within the EU. While Angela Merkel and to push Ukrainian goods transportation from its
Vladimir Putin support the pipeline, Donald threatened south-eastern region onto the roads
Trump is opposed, as are the Polish Prime and railroads to ports such as Odessa in the
Minister and Ukrainian President. west. This will increase costs and possibly lead
In total, these pipelines have the capacity to to serious capacity constraints. Thus, at the price
supply a quarter of the EU’s consumption. of some probably-tolerable new sanctions,
Frequent disputes through 2009 over pricing of Russia has expanded its economic war against
gas shipments to Ukraine, and transit fees to the Ukraine and may possibly look for further
rest of the EU, triggered Russia’s cuts in the gas concessions or territory.
feed into the overland pipelines. Meanwhile, Whilst the politics surrounding the
disagreement arose over Ukraine’s diverting to infrastructure discussed above is complex,
itself gas intended for other countries which needless to say, little of this type of infrastructure
resulted in shortfalls of deliveries to EU third party build would have materialised in the first place
countries not involved in the dispute. were our planet a geopolitically sweet world.Infrastructure bypasses geopolitical choke points 13 Although the bridge had long been proposed, it was not launched until conflict cut the route across the Isthmus of Perekop.
14 Konzept
What the history of
populism can teach
us today
“What is the end of our revolution?” helped reverse this trend, which was supersized
wondered Robespierre, one of the populist by China’s reintegration into the world economy
leaders of the French revolution. It was perhaps a and its own working age demographic overhang.
more insightful question than he realised. After a This abundant global labour supply over the
decade of revolution proper, waves of populism past few decades has led to constant downward
surged and retreated as France lurched between pressure on the price of labour. Indeed, workers
dictatorship, monarchy and democracy. in many countries have experienced a near
The French revolution is just one of many three-decade freeze in their real wages, just as
historical examples of how populist surges shape increased home and asset ownership, rising
politics and economies. And while they create wealth and leverage combined to create a kind of
great uncertainty, the repeating themes within money illusion. This may not have been felt
make it possible to view today’s populist surge acutely before the financial crisis, but it certainly
through a tighter lens than many realise. These was after it hit. At this point, wealth and leverage
themes include economic hardship, issues of disappeared and workers looked more towards
national identity, and an electorate that feels a their pay packets. They were increasingly
fundamental dissatisfaction with the incumbent frustrated with what they saw and the long-term
political class and the state of the country. under-performance of wages was exposed.
That these themes are common to most Stagnating wages is one thing, but
populist episodes should quell some of the economic crises tend to leave large numbers of
trepidation many feel today. Economists and people unemployed and when this occurs, it is
politicians can use learnings from prior episodes understandable that the population’s growing
to help shape their decisions on issues such as frustration can be channelled towards a populist
fiscal policy, quantitative easing, protectionism, agenda. The figures surrounding the financial
and immigration. Meanwhile, investors can use crisis speak for themselves. Unemployment in
history as a navigational aid as the current tide of the US peaked at ten per cent while in Europe,
populism changes the landscape. things were even more severe. Exacerbated by
the sovereign debt crisis, about a quarter of the
Economic crisis Spanish and Greek workforce found themselves
There is an argument to make that the out of work. Even in countries where the effects
seeds of today’s populism were first sown in the were less severe, such as the UK, real wages are
early 1980s. This period marked a key global barely higher than they were before the crisis.
demographic turning point which coincidently Adding to discontent at the economic
occurred with China’s re-integration into the malaise, was the way in which technology and
global economy for the first time in several trade were changing the nature of work. This
centuries. Indeed, in 1980 there were very few sped the decline of old industries, while
workers relative to the overall population and legislators struggled to keep up with the rise of
they therefore had pricing power. Nearly four the ‘gig economy’ and its implications for
decades on, the ageing baby boomers have labour relations.
Jim Reid, Henry Allen & Luke TemplemanWhat the history of populism can teach us today 15
It should therefore not be surprising that hyperinflation crisis in the early 1920s where the
economic crises have been the overwhelming destruction in the currency’s value led to the
catalyst for populist revolts through history. Take, German government defaulting on its reparation
for example, the French Revolution. This payments. Compounding this, the Great
movement started after a succession of poor Depression sent unemployment soaring and
harvests that resulted in sharp increases in food millions were left destitute. By 1933, per capita
prices. On top of this was a fiscal crisis at the output was no greater than it was two decades
state level as a result of France’s participation in earlier. The desperation felt by many people was
various wars, as well as general profligacy. Of seized upon by populists and channelled into the
course, other factors were at play but it was the Nazi rise to power.
economic crisis and the hardship it inflicted upon
many French citizens that created the conditions Asserting national identity
for a revolution. The second common theme behind populist
Later, the 1848 revolutions in Europe also episodes is the assertion of national identity, and
followed a period of serious economic hardship. the parallels between the events of today and
While the revolts are generally seen as ‘liberal those in history are striking. Anti-immigration
revolutions’, where people rose to demand policies are perhaps the most visible example.
political reform and democratic rights, it is Indeed, when Donald Trump announced his
notable that the period followed the failure of candidacy for the presidency, his speech made
potato crops in the 1840s and the associated waves for its comments on Mexican immigration.
severe famine in much of Europe. One study His campaign featured strong rhetoric against
showed that the price of wheat in France and
Prussia rose by more than half in the two years to
1847. That price escalation was cataclysmic
given the swathes of the population who lived
close to subsistence1. While the tragedy in
Ireland was the most visible outcome of the
famine, there were also thousands of famine-
related deaths in continental Europe. In turn, as
people spent more on food, manufacturing
began to slump. As a result, unemployment rose
and the continent’s economic woes spiralled into
revolutionary sentiment.
Economic distress has also led to darker
outcomes, as seen with the Nazi seizure of power
in interwar Germany. The reparations mandated
by the Treaty of Versailles after the first world
war were layered on top of an already fragile
economy. Indeed, by the end of the war, German
economic output had shrunk by 30 per cent on a
per capita basis. This was followed by a16 Konzept
illegal immigration and on bringing down agenda. The French King Louis Philippe
immigration generally. In government, Trump has abdicated and the second French Republic was
raised the idea of ending birth-right citizenship established (albeit short-lived after Napoleon III’s
and reiterated his desire to build a wall along the coup in 1851). Prussia also moved in the direction
Mexican border. of a constitutional monarchy, as did Denmark.
Europe is also dealing with issues of The Hungarian revolution was suppressed, but
national identity and immigration. Indeed, eventually led to the Austro-Hungarian
sovereignty and the free movement of people Compromise of 1867 that established a dual
were key factors behind the Brexit vote, although monarchy for the countries.
this was intertwined with economic deprivation In our own time, the revolt in Eastern
and government spending cuts. Similarly, Marine Europe in 1989 and the recent Arab Spring
Le Pen in France, the League in Italy, the AfD in protests were strongly driven by a spirit of rising
Germany, and others have attacked the level of against entrenched rulers to “set the country on
immigration. Some European governments, such a better path”.
as Hungary and Poland, have even refused to This isn’t to say that populism has always
accept asylum seekers. led to more liberal or democratic outcomes. In
Historically, this is not unusual. In mid- the interwar period, Hitler and Mussolini led
nineteenth century America, there was fascist regimes, while the Bolshevik revolution in
opposition to the immigration of Roman Catholics Russia resulted in vast repression as communists
from European countries, such as Ireland, gained control. However, despite the result, all
because of fears it would change the Protestant these movements arose from deep
culture of the US. Not long after, a backlash dissatisfaction towards the ruling class and a
against Chinese arrivals led to the Chinese desire to shake up the status quo.
Exclusion Act of 1882. This policy was partly the
result of fears that Chinese workers were taking Looking forward
American jobs, a theme starkly prevalent today. It is ironic that just as populism has taken
National identity has also raised its head in root today, the demographic super-cycle that has
other forms. In particular, demonstrations in the depressed wages since 1980 has recently
mid-1800s in countries such as Germany and peaked and should slowly reverse, lowering
Hungary were precipitated by a desire for workforce numbers in more economically
nationhood to be recognised. Looking further significant countries. That means, left to its own
back, the French Revolution saw the rise of the devices, labour should begin to regain pricing
mantra of liberté, égalité, fraternité and the power. This power may be amplified by the fact
Tricolore flag emerged. that many populist policies are already helping
lead labour’s fightback.
Dissatisfaction at the political class and the Against the backdrop of improving
state of the country demographics for workers, we can extrapolate
The third theme that repeats through history the lessons of populist history to make
is that populism and social unrest have been predictions about how the future may play out.
driven by dissatisfaction at the governing Before we do, it is necessary to determine the
powers. Populists tend to desire a system that direction and brand of populism that societies
favours citizens rather than the establishment. may face. Taking a step back, it seems strange
Brexit and Trump, though distinct in a number of that right-wing parties dominate today’s populist
ways, were both rebellions against the political, agenda. After all, if populism stems from
financial, and media establishments, who were economic concerns, then one would assume a
mostly opposed to both. preference for left-wing parties given their
The desire to throw out the old ways and support for greater wealth redistribution to low
start afresh was entrenched in French and middle-income households. Yet right-wing
revolutionaries. The Tennis Court Oath of 1789, pro-business parties dominate.
one of the defining points of the revolution, was The reason is that people frequently view
framed around the push for constitutional reform their notion of dignity and respect as more
that eventually led to the overthrow of the French important than their economic situation and are
monarch and the declaration of the Rights of willing to sacrifice the latter, at least in the short
Man and of the Citizen. term. The political scientist Francis Fukuyama
Similarly, the 1848 revolutions in Europe recently argued this stems from the desire for
shared a desire to progress a liberal democratic isothymia, which can be simplistically translatedWhat the history of populism can teach us today 17 It is ironic that just as populism has taken root today, the demographic super-cycle that has depressed wages since 1980 has recently peaked and should slowly reverse...
18 Konzept
as “a desire to be respected as an equal”. may be unpopular with the population. However,
Fukuyama noted that in recent times, significant there is a possibility that central banks could
portions of the population in several developed deploy unconventional monetary policy through
countries have viewed the established other methods. These could include creating new
government as giving some groups priority and money to fund fiscal spending or delivering it
ignoring others. This feeling of unequal treatment directly to the population to encourage spending
or disrespect opened a void that right-wing in the real economy. Although inflationary, this
populists filled with promises to restore a ‘better’ would provide a way to achieve higher spending
past and a greater sense of dignity. in the short term.
However, it would be wrong to completely To bolster the notion of identity and control,
dismiss the emergence of left-wing populists. we can expect populists to continue to promote
Indeed, left-wing parties have been left reeling by protectionism, both of trade and immigration,
the recent swing towards right-wing groups and despite the evidence that free trade and
they will surely react. If they can satiate voter immigration provide significant economic
desires on issues of national identity, and also benefits. President Trump’s imposition of tariffs
offer their traditional policies of economic on Chinese imports, and the renegotiation of
redistribution, the pendulum could quickly swing NAFTA into the USMCA are just two examples of
their way as it did in Greece and might do in the policies other countries seem likely to pursue.
UK. In that case, economies can expect higher The countries that take this route should expect
taxes on the wealthy and corporations, as well as higher consumer prices as tariffs are imposed,
the nationalisation of high-profile organisations and a restriction of consumer choice.
and infrastructure. Regarding immigration, the reduction
Another consistent theme of history is that promised by many populists will almost certainly
populists enact fiscal expansion. Already in the hurt public finances and exacerbate the problem
US and Italy there are signs of this, while the of ageing populations in many western countries.
French government has proposed higher Immigrants tend to be younger workers who pay
spending and tax breaks for bonuses and taxes and consume less state healthcare and
working overtime in response to recent protests. pensions. Without immigration, the working
Markets should therefore prepare for the likely population of western countries will bear an
consequences: overheating economies, increasingly large tax burden to support an
inflationary pressures, higher debt increasing ageing population.
bond yields, and an eventual slowdown as the To determine where the immigration
economy fails to sustain above-trend growth. policies of western nations are heading, we can
The mechanism for fiscal stimulus has look to Japan, a country long resistant to
historically been a large-scale military buildup, immigration. More than a quarter of the
usually driven by a desire to “restore the Japanese population is now aged over 65 and
dignity” of a nation. Today however, military the total population is shrinking. Although this
clout is less important compared to the desire to situation has been known for decades, it is only
improve living standards. Hence populists in recent years that the country is examining
promise more secure jobs, higher disposable proposals to allow more foreign workers.
incomes and a notion that the country’s identity That bodes ill for Europe. Over the next two
is intact. As a result, we can expect more decades, Germany, France, and Italy are all
economic policies to revolve around income tax forecast to reach the point at which a quarter of
cuts, infrastructure spending, and in some their populations will reach 65 years of age. If
cases, universal basic income. Japan is only now dealing with the problem,
If these policies slow the economy, other countries may also kick the can down the
investors should expect central banks to react road until the problem becomes more serious.
differently compared with their actions in the However, by that point, the damage of labour
past. This is because much of the recent populist shortages will already be forcing either higher
anger has centred on widening inequality, taxes or greater government borrowing to
something that was exacerbated by quantitative maintain existing levels of spending for the
easing. With populist politicians in several elderly with a working population in decline.
countries already exerting pressure on central The historical lessons of our third theme,
banks, it will be difficult in future slowdowns for the dissatisfaction at the political classes, is more
central bankers not to consider that quantitative nuanced. That is because prior periods of
easing and other policies that boost asset prices populism and revolution went hand-in-hand withWhat the history of populism can teach us today 19
the desire for liberal constitutional change. Yet, in the medium term as changing demographics
most developed countries today, a wide-ranging helps labour regain some of its pricing power.
liberal democracy is well established. More immediately, though, it has already
Accordingly, today’s populists have generally not become apparent that some of the bold
opposed the constitutional system in which they promises made by populist parties cannot be
seek to govern and, in most cases, have not implemented. Furthermore, populism is far from
upended other institutions of government. universally popular. Indeed, the recent US
Instead, populist political reform has tended midterm election result that saw the Democrats
to focus on bringing citizens closer to government capture the House of Representatives was partly
and this will likely continue. For example, driven by the electorate voicing its displeasure at
supporters of Brexit want to shift various EU President Trump.
competencies back to the UK. Even pro-EU If and when the current populist tide
politicians have echoed this sentiment. For recedes, it will leave behind a changed political
example, French President Emmanuel Macron landscape. Fundamental left-right questions
has proposed the idea of democratic conventions about the size and reach of government are
of citizens that would advise on policy. complex and ongoing, as are questions of the
A consequence of this political shift could appropriate level at which sovereign power
well be the greater fragmentation of political should rest. Nevertheless, looking at other
systems and nation states. The rise of separatist waves of unrest in the developed world over the
movements in Scotland, Catalonia, and Quebec last two centuries, we can expect this period to
show the desire of some regions to chart their eventually subside and for stability to return, as
own path, while regions within countries have happened in previous episodes in Europe and
pushed for greater devolution of power from the US.
their respective central governments. The While talk centres on how political parties
consequence is greater policy divergences both should react to populist voters, the underlying
within and between allied countries. Barriers to social and economic problems in many countries
trade will emerge as each set their own laws remain unaddressed. Fukuyama notes it is far
and regulations. easier to pay lip service to under-privileged
Similarly, we can expect to see continued groups by funding token projects than it is to
attacks on supranational institutions and a enact real change. With that in mind, legislators
renewed emphasis on the importance of the must enact wholesale programmes that offer
nation state as the appropriate platform for marginalised people the skills that provide
policymaking. This is already happening in the opportunity. With opportunity comes the
US, Italy, Poland, and Hungary. It is also gratification of respect and that is the key theme
interesting to consider that the fragmentation that history tells us prevents populist uprisings.
of politics in some areas may actually
encourage integration in others. For example, in
response to some of the polarising voices in
Europe, many pro-EU leaders are banding
closer together. In particular, the German and
French leaders are advocating further
integration through various channels.
Fragmentation at a national level could
easily trickle down to the corporate level where
workers could demand more say in their
organisation. Already, Germany operates works
councils and in Britain there have been similar
calls for workers to be placed on company
boards. Given low unemployment in many
economically significant countries, and the fact
that they are beginning to see their working
population peak, workers’ bargaining power
should improve and support for these
arrangements will likely gain momentum.
The current populist tide could rise further
in the near future but we expect it to recede over 1 Berger and Spoerer (2001)20 Konzept
Q&A on
US politics
The following is an interview taken by Peter macroeconomic implications, such as
Hooper, Deutsche Bank’s global head of infrastructure investment, spending caps, and
economic research, who sat down with the head pharmaceutical prices. If and when the
of Deutsche Bank’s Office of Government Affairs government does get back to more normal
in Washington, Francis J (Frank) Kelly. functioning, will a split Congress, conflict over a
A long-time Washington insider, Frank wall, and investigations mean that gridlock
began his career as a White House writer for prevails in Washington, or will progress be made
Presidents Ronald Reagan and George HW Bush. on issues where many can agree there is need?
He went on to head up public affairs for the
Department of Justice and then the Securities 1. Frank, as we go to print, the government
and Exchange Commission, after which he shutdown is now more than three weeks old.
established a Washington office for Charles How do you see this ending, and what impacts
Schwab & Co. He opened the office for Deutsche will it have?
Bank in 2003. Over the years since, Frank has It was extraordinary to watch in early
been a regular participant in many of Deutsche December as President Trump “took on the
Bank’s higher-profile client conferences that mantle” of a government shutdown unless he
touch on the political scene in Washington. received funding for his US-Mexico border wall. I
have never seen anything like it. And it has gone
Recent events in Washington have been on much, much longer than most observers
fascinating and fraught. During its first two would have expected – a new record for a
years, the current administration has shaken shutdown. But it plays strongly to the President’s
Washington to the core on many fronts. Now, it voter base – many of whom think large portions
faces the results of a significant public backlash of the US government are wasteful and needless.
in the outcome of the midterm elections and a Still, a majority of Americans do not support the
paralysis largely of its own making in the form of idea of a wall and are blaming President Trump
a partial government shutdown. While President directly for the shutdown.
Trump’s Republican party may enjoy an increase Now we have a real mess. While it could
in its slim majority in the Senate, the House of end at any time, more likely it will drag on well
Representatives has swung solidly to a into the current two-week pay period recently
Democratic party that has been champing at the begun, and potentially a good while longer.
bit to take the reins on investigation and review. Pressure will build for a resolution as more
Many critical issues are up in the air, including services are impacted. The increase in waiting
regulatory reforms, immigration reform, trade times in security lines at airports are only one
policy, investigations driven by the Special indication. As your own analysis has suggested
Counsel, and other legislation with Peter, given reduced hours worked, as well as
reduced spending by both the 800,000
government workers affected and a potentially
Peter Hooper with Frank Kelly even larger number of private workers onQA on US politics 21
government contracts not receiving pay checks, poisoned the waters in a significant way between
the loss in GDP could exceed 0.1 per cent for the President and Pelosi and Schumer. So, expect
every two weeks that goes by. Much of this will Democrats to be highly cautious going into all
be made up after the issue is settled and workers deals going forward.
are paid retroactively. But there will be longer- But what overshadows all of this are
term negative effects on issues ranging from the congressional investigations that are coming into
ability of the government to recruit talent to the both the Trump Administration and the
public’s confidence in its ability to provide President’s businesses. I suspect the
important services. The Fed and the markets will developments here will be quite rough.
be flying half blind for a while due to delays in the
production of key data. 3. What is your view of the new leadership
on Capitol Hill?
2. Let me return to the question I was It is, in some respect, back to the future:
originally going to ask you at the outset: Nancy Pelosi is again Speaker of the House
How has the outcome of the midterm following her stint from 2007 to 2011. She is the
elections affected prospects for the functioning of first woman to serve. Steny Hoyer is the House
the government—can we expect gridlock or Majority Leader and James Clyburn is the
agreement (and on what)? How do you see Majority Whip. Both served in the same roles
working relations between the administration and back in the 2007-2011 period. And Pelosi, Hoyer
Capitol Hill and within Congress? and Clyburn are, respectively, 78, 79, and 78
We were offered a sneak preview on live years of age.
television over the holiday period when the What is different is, while this trio returns to
incoming Speaker of the House Nancy Pelosi and leadership, they are making accommodations to
Senate Minority Leader Chuck Schumer went to foster younger leadership to step up in the next
the White House to meet with the President. It two to four years. And that younger Democratic
was a long, loud and intense debate on funding leadership is seen as more progressive or
the border wall that was beamed around the left-wing than current leadership. That will
world live. That meeting and the government definitely have an impact on the House legislative
shutdown that ensued pretty much set the tone agenda and, I suspect, will be quite market
for what we can expect to see in policy debates. relevant as it will go to tax, environmental, and
Fundamentally, President Trump prides health policy issues. And they have agreed to
himself on being a deal maker. And he seems to term limiting themselves after four years.
actually enjoy bargaining with opponents. So, In the Senate, it will be exactly as we saw it
with Democrats in control of the House of for the last few years: Mitch McConnell will be
Representatives for 2019-2020, I would expect Majority Leader and will set the legislative
intense public debate between the President and agenda for the next two years. However, in 2020,
Democratic leadership over a host of issues. But I 28 Republican seats will be up for re-election and
also believe the US shutdown has potentially potential primary contests, as many as six to22 Konzept
seven in Democratic-leaning states. This will that created the Department of Homeland
impact the behaviour of those senators and how Security policies around immigration interdiction?
they vote. The popularity of President Trump will There is nothing unusual here. Opposing
also have an impact on their views and voting political parties in control of either the House or
decisions. One key moderate Republican senator Senate have done this sort of thing since the
has already announced his retirement in 2020, creation of Congress. Nevertheless, they can be
meaning he could be less constrained in his market-moving, significantly impacting whole
voting. With others possibly following, McConnell sectors so investors must watch carefully.
could face some challenges in controlling his
relatively slim three-vote majority in the Senate. 5. Legislation vs investigation, where is the
emphasis?
4. What does the legislative calendar look This is the first big challenge to incoming
like—key dates, what to look for in coming weeks, Speaker Pelosi. She has to find a balance here
months, and year? and that will not be easy as political emotions
We can expect Democrats to be quite within the Democratic Caucus are sky-high.
energetic about a number of legislative priorities For example, there are, reportedly, more
ranging from healthcare reform, to looking at than 80 separate requests from senior House
re-writes of the recently passed tax bill, to Democrats wanting to open specific lines of
infrastructure reform. investigation. If Pelosi allows this – effectively
Also, the President will be giving his State of allowing every committee to launch their own
the Union Address to Congress in late January. line of investigation – the risk becomes that
This is important because he will be laying out actual legislation is side-lined and the American
his legislative agenda for 2019. And it will be here public looks at Democrats as incapable of
that we will be looking for where and how there actually governing.
can be any bipartisan issues – infrastructure, That would potentially be impactful to not
healthcare, tax, etc. only the Democrats’ chances of holding onto
And remember, the debt ceiling issue will control of the House in 2020 but also winning
quickly re-emerge. But will House Democrats control of the Senate and White House in 2020.
demand some legislative deal in return for a What to do? I suspect Pelosi will either
positive vote? We will have to watch for that but funnel all the investigative issues into a special
there is no way Congress will let the government committee for investigations or ask one or two
fall into default, no matter how ugly the politics committees to manage them. Balance – she will
are by then. insist on balance.
While we think the election season just
finished, we are going to go quickly into the 2020 6. What are the chances of any major
presidential campaigns. This will diminish the legislative initiatives, and what would they be?
energy in Congress in 2020 – meaning, don’t I think a number of legislative initiatives
expect anything major to be done then. That have hope. Infrastructure spending is a top
means Congress is going to have to work hard in priority for both House Democrats and President
2019 and it’s going to be a short, intense Trump. The big question here is how to pay for it.
calendar to work within. Senate Republicans are likely to be hesitant
We also expect House Democrats because of the cost – and impact on the already
immediately to launch a number of letters of – ballooning federal deficit. However, the
inquiry (and more than a few subpoenas) flying Democrats want to revise the recently enacted
out of committees to government agencies and tax bill. So, a new tax bill could emerge, which
departments as they inquire into how and why could pay for at least a portion of the
the Trump Administration made any number of infrastructure bill. President Trump may have to
policy decisions. swallow a tax change/increase if he is going to
For example, how and why did the get an infrastructure package. Barring that, the
Environmental Protection Agency relax Democrats would have to go along with more
regulations around coal? What was the process deficit spending.QA on US politics 23 We can expect Democrats to be quite energetic about a number of legislative priorities ranging from healthcare reform, to looking at re-writes of the recently passed tax bill, to infrastructure reform.
24 Konzept
Also, President Trump and House cent to annual growth of economic output over a
Democrats are aligned on finding a way to cap number of years – even less if it is tax financed.
pharmaceutical pricing. But, again, Senate With the economy already operating at beyond
Republicans will be resistant to doing this and full employment, this would only help if the
President Trump will have to find a way to economy is already slowing.
convince them to support whatever emerges. Gary Cohn drafted a proposal before he left
Also, immigration reform will be revisited the White House, but we think that was only a
but a comprehensive solution is unlikely. starting point. There are many possibilities but no
definitive plans at this point.
7. But doesn’t this beg that question: Does Also, there is the prospect of foreign
anyone in Washington care about deficit investment. We know Japan is looking to invest
spending, the growing size of budget deficits and billions in the US. Similar discussions apparently
the ballooning federal debt? Will these concerns have taken place with Saudi Arabia. Chinese
have any impact? President Xi and President Trump actually
I am sure there is someone here who does discussed Chinese investment in infrastructure
care. But he or she is an awfully lonely person when he visited the US in 2017. Congress will
– among elected officials, no one seems willing debate whether to go along with foreign
to step up, shout it out loud that the deficit is out investment and there are a lot of possibilities.
of control and push to get it under control. By the This being Washington, everything is
way, whatever happened to Social Security election related and 2020 is going to be a big
reform and other entitlement reform? All of this year for both parties. Economic growth – or
has, for the time being, slipped off the political shrinkage – will be a key determinant for voters.
radar screen.
But this brings us back to your last question 9. With 2020 in mind, is there anything else
and chances of an infrastructure spending that could add significant fiscal stimulus to the
package. How to pay for it with the deficit so out picture in the next couple years?
of control? I alluded to Democrats pushing for at Aside from a possible infrastructure bill,
least modifications to the recently enacted tax appropriation bills and a possible tax revision bill
bill. Perhaps that could put at least a small dent along with Obamacare fixes are on the docket.
in the deficit beyond helping to pay for part of an As I mentioned earlier, House Democrats are
infrastructure package. But beyond this, the only sure to work up some sort of tax bill – likely to
way is cutting government spending in some focus on raising corporate tax rates slightly to
meaningful way. restore the state and local tax deductions that
were taken away in the 2017 tax bill. I would also
8. So let’s focus a little more on the expect efforts to cut middle-class taxes as well.
prospects for an infrastructure spending package The challenge will be cutting a deal with the
and what it might look like. Republican Senate.
You raise some multi-trillion dollar
questions. How big? How is it funded? Do 10. What about the prescription drug
Democrats go along with public/private program and pricing? Could this have a significant
partnerships? Will Senate Republicans go along impact on consumer prices?
with more debt spending to pay for it? And what Absolutely. With Boomers coming to the
will they spend it on? Potholes and rusting age where prescription drug prices really mean
bridges or building highways for electric cars and something to them, it has become quite a
driverless trucks? New ports for growing oil and populist issue. President Trump hears it and
gas exports? agrees. And Democrats have long made the
Whatever is done and however it is paid for, same case. President Trump has formulated
it will be a multiyear plan – not one giant lump several plans to force prices lower. In October, he
sum. As you have noted in our recent discussions, rolled out a plan aimed at lowering Medicare
a package would be a boost to the economy but drug prices. He was criticised by fellow
probably limited to only several tenths of a per Republicans for going too far while DemocratsYou can also read
