German investment bank Berenberg believes that "some aspects of Donald Trump’s successful election campaign evoke memories of the dreadful 1930s."
The bank's chief economist Holger Schmieding says in a note sent out on Monday that: "After the Brexit vote and the triumph of Trump, the echo of the early 1930s sounds a little less faint than it did before."
Schmieding highlights populism, rising protectionism and nationalism, isolationism, and the erosion of the political middle ground as key features of both the current political climate and the 1930s.
"Populist" leaders — often dictators such as Hitler and Mussolini — came to power across Europe in the 1930s with promises to restore glory and honour to their countries, often blaming foreign races and religions for the problems.
Both recent the Brexit and Trump campaigns blamed outsiders for problems at home (the EU, Mexicans, Muslims) and had strong nationalist streaks (Make America Great Again, Take Back Control).
International trade tailed off in the wake of the 1929 Wall Street Crash as the US turned inwards. Schmieding says: "Two major policy mistakes turned the financial crisis into a depression" — the US fed tightening monetary policy and the 1930 Smoot-Hawley tariff act, which enacted protectionist taxes on imports.
Both Trump and the current pro-Brexit UK government have promised to reverse the rising tide of globalism. Trump plans to do this by scrapping or significantly changing a trade deal with Mexico and putting tariffs on imports from China. UK Prime Minister Theresa May has promised to reign in globalisation.
Schmieding calls the 1930s "dreadful" because the Great Depression, triggered by policy mistakes, led to widespread poverty. The potent economic and political cocktail of depression and nationalism also led to World War II.
But Schmieding says that "the [current] situation is very different in at least three key respects." These are:
Rising employment: "Despite widespread anger at the establishment, we are not quite living in pitchfork times again."
Lack of ideology: "Trump and some other leading populists today come across as opportunistic self-promoters rather than incorrigible ideologues."
International cooperation: "Institutions of international co-operation and the rule of law at home are much stronger in the developed world than they were in Europe in the 1930s."
As a result, he does not think we are hurtling towards another major global conflict or serious economic crisis. Still, there are significant risks.
'Try to see it through Putin’s eyes'
The first is Trump's attitude to the Middle East. Trump has signalled he will move the US to a more isolationist stance when it comes to international affairs and has no interest in getting involved in Syria. This could create a power imbalance in the region that creates trouble in Europe.
Schmieding says:
"Having intervened forcefully to tilt the balance in Europe in WWI, the US thereafter did little to stabilise the fragile new order it had helped to establish, preferring to retreat instead. Could something similar happen again, this time in the Arab world in Europe’s immediate neighbourhood? If so, the consequences including potential further flows of refugees would be a much bigger issue for Europe than for the US itself."
The second risk is Russia.
Schmieding thinks that Trump's good relationship with Putin and his reputation as a "wheeler dealer" could lead to "a businessmen’s deal on, say, new borders for Ukraine," which would destabalise Russia's relationship with the EU.
Schmieding says this is unlikely. A greater threat is, once again, Trump's isolationist views and his anti-NATO stance. Schmieding writes:
"Try to see it through Putin’s eyes. After Russia had invaded parts of Georgia in 2008, US President Barack Obama pushed the policy “reset” button upon coming to office in 2009. Putin’s attack on Ukraine yielded visible gains (Crimea, Donetsk) for him in 2014 at limited Russian casualties. That boosted his popularity and stabilised his regime despite some significant economic costs. Why not do it again, unless the economic costs seem prohibitively high?"
'Populists can promise their voters the moon. But they cannot deliver.'
Finally, Schmieding flags perhaps the greatest global risk — that Trump and Brexit are just the start.
There is a risk of more contemporary fringe parties rising to power across Europe and while Schmieding does not believe France's far right National Front Party will get a Trump boost as party leader Marine Le Pen has suggested, he writes: "The experience that pollsters got the Brexit vote and the US elections so wrong adds to the concerns. In the same vein, the Italian risk is not trivial." (Italy will hold a constitutional referendum shortly and a loss could destabalise Prime Minister Matteo Renzi.)
HSBC and Macquarie last week flagged the danger that a Trump victory could make the rise of populist parties like the National Front and Italy's Five Star Party more likely.
And ultimately, Schmieding says that:
"Populists can promise their voters the moon. But they cannot deliver." When Trump and Brexit fails to deliver everything people hoped it would — almost inevitable because the two movements meant so many different things to so many different people — there will be more anger.
He adds:
"Who will rustbelt voters fall for next time if Trump does not bring back the jobs lost to China? What if Brexit results in fewer rather than more jobs in UK industry? What if curbs on immigration stoke inflation and damage the National Health Service (NHS) in the UK instead of raising the living standards of disgruntled voters in northern England?What comes after the current batch of populists is a key risk to watch."
"What comes after the current batch of populists is a key risk to watch."
If the problems Brexit and Trump campaigners highlighted are not solved, a new batch of firebrand politicians could come along and exploit public anger to rise to power. Who knows what they may look like.
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