• Gerd Hübner

On the wrong track.

(Reading time: 5 - 9 minutes)

Lerbach Bahn

Future risks. The dissatisfaction of considerable sections of the population gave a boost to populist currents in the Western world. The Lerbach Round discusses what consequences this could have for the long-term growth path of the economy, the European Union and ultimately also for the capital markets. And is considering how wealthy private investors should adjust their investment strategy.

"The current rise of populism poses massive threats to political and economic stability in the Western world." (Clemens Fuest, President ifo Institute)

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"Whether Brexit, the election of Donald Trump as US President or the success of parties on the political fringes in Europe - all these are signs that we are dealing with a zeitgeist phenomenon of populism in the Western world," reflects Bernd Riedel, Robeco, "and we suspect that this trend will also have a long-term influence on the economy, the Zukunft Europas website and the investment strategy.

The Lerbach round discussed answers to the most important questions on this topic.

10 What are the reasons for the success of populist movements?

"Basically, populism reflects the bitterness of the middle class in the industrial nations over socio-economic changes brought about by developments such as globalization or automation, in which low-skilled workers are being replaced by computers," explains Ulrich Voss, Tresono. "These people have the fear and worry of falling down in the back."

"For me", Peter Hollmann, PatriCon, makes clear, "this development is also due to the failure of the elites. Problems within the community have been ignored or played down by established politics for too long. That's why we now see the unterschiedlichsten Varianten of 'that one up there' and 'that one down there'."

"Politics gives the impression of a lack of problem awareness. There is simply a lack of open and honest communication," criticizes Michael Huber, VZ VermögensZentrum. "In fact," Thomas Neukirch, HQ Trust, Thomas Neukirch, reflects, "the established politicians avoid speaking out uncomfortable truths at all costs - whether it's about the costs of migration or von Europa". At the same time, the complexity of the world is increasing. "And hardly anyone is in a position to explain this to people in an understandable way," Michael Gollits, von der Heydt, points out.

In this situation it is easy to win the "silent majority" with simple slogans. "The phenomenon of populism is therefore not a disease in itself, but rather ein Signal, that there are structural undesirable developments that politics and business should take more notice of and urgently correct," explains Christian Jasperneite, M.M.Warburg. These include inequality in income and wealth, unjustly perceived taxation, neglect of public infrastructure, unplanned economic migration, underestimation of the working population. "If we do not succeed in reversing the bitterness of many people through concrete solutions, many industrialized countries will be threatened by an expansion of populist currents," meint Hollmann, "and that would have fatal long-term consequences for the economy."

// 11. The economic consequences of populism.

"Basically, populism means a trend towards lack of solidity," says Karsten Tripp, HSBC Deutschland, "denn Populisten promises its own voter base to fulfil its wishes regardless of whether this is economically feasible on a sustainable basis. In populist countries, public finances tend to deteriorate and debts increase. Examples from Latin America show that this can go as far as financial disruption.

However, the impact on growth and the economy is different in the short and long term. "In the short term, even growth impulses are possible," Huber reflects: "There will be more government investment in infrastructure, credit-financed economic stimulus programmes and higher social transfers - this will support domestic demand. Donald Trump currently provides a small foretaste with his tax reform. "It fires a fully employed economy without counter-financing. This is adventurous and will take revenge later," says Hollmann.

The langfristigen Kosten, warns the round, would always exceed short-term profits. "Possible trade wars and the introduction of tariffs usually put an additional burden on economic growth in such a scenario. And if certain wage groups get stronger and real wages rise, this leads to more inflation", Thomas Neukirch reflects.

"We are also seeing live in Britain today what a burden it puts on the economy to restrict the free choice of jobs," adds Gollits. Europe has already received an indication of what foreclosure costs in the letzten Jahren . "The reintroduced border controls in Germany, Austria, Sweden and France alone burden the companies in the affected countries with nine to 15 billion euros each year, according to calculations by the ifo Institute," he explains.

"I find it even more worrying that, after a phase of deregulation, policymakers would then probably switch over to over-regulation," adds Karsten Tripp: "More government, slowed growth forces, fewer opportunities for companies to make a profit, an increasing tax burden for globally active companies.

But it is also piquant that the prevention of populism is not free of charge. "It will lead to similar reactions - more government spending, more debt - but in a much more moderate form," smiles Voss.

12. The consequences of populism for the capital markets.

The participants in the round agree that long-term burdens on the global economy would of course also have an impact on the capital markets. "We would have to expect declining corporate profits and higher inflation. Das would burden the stock and bond markets," says Michael Huber. This scenario is already weighing on the markets today. "The risk of policy mistakes is increasing, fragility and uncertainty are rising," adds Peter Hollmann, "and risk premiums in all asset classes must therefore also increase as a result - the price/earnings ratios would therefore fall accordingly.

// 13 The future of Europe and populism.

According to the Lerbach Round Table, the future of Europe and the euro are also closely interwoven with the issue of populism. "In France, the professed European Emmanuelle Macron came to power because voters wanted to prevent populism von Frau Le Pen," Bernd Riedel reflects, "and in Italy, two political parties from the margins won the recent election because they served the Euro-sceptics.

"In principle, the basic pattern is the same again: Schlechte Communication and the failure of the elites open the doors for populists", überlegt Huber. According to the experts, the history of the euro in particular is a series of deceptions and tricks: kreative Accounting for the accession of Italy and Greece; wiederholte and open breaches of all the "iron" stability rules of the Maastricht Treaties; offenkundiger Breach of the "no bail out clause", which should forever exclude liability of all member states for obligations of individual member states.

"Also today nobody tells people openly which burdens really come to us through a common Europe", criticizes Neukirch. "In addition, the EU continues to be an abstract entity for most people. For me, the Brexit was also a reaction to the fact that many wonder what 25,000 employees of the EU Commission are actually doing in Brussels," adds Jasperneite.

In principle, there are only two alternatives in the long term - a further deepening of Europe with a transfer union in which everyone is liable for everyone, or the disintegration of the euro," says Voss. "Since neither would be in Germany's interest, I'm curious to see how politics can manage this balancing act." In fact, the situation is tricky. "New systems for the pooling of risks - in the case of banks or public debt - would set false incentives and would be the official end of the originally promised Stability Union," considers Gollits. "Der Widerstand on the other hand - fueled by populists - would then further increase the risk of the euro breaking apart. Und that would also be really expensive for Germany," says Jasperneite. "The Deutsche Bundesbank's target claims against the central banks of the southern countries alone amount to around 900 billion euros. This is implicitly a transfer payment and would have to be written off if the euro were to break up", erklärt Neukirch.

That's another reason why, he continues, a third variant is most likely in the foreseeable future: "Keep up the good work". However, some people have some doubts as to whether the monetary union will still exist in its current form in 20 years' time.

14. The consequences for the investment strategy.

Populism would lead to a further dilution of the monetary system, because the major central banks would have to finance the benefits of the populists. Ulrich Voss therefore also advises "a position of gold that should not be missing in any allocation". With a view to the latent risk of a collapse of the euro zone, a geographical diversification of assets into different jurisdictions would be appropriate. "And strategically, a currency component outside the euro remains important, especially in US dollars," says Huber.

The capital markets are still ignoring these dangers. "With the Policy Uncertainty Index, there is an indicator that indicates at an early stage when they could become relevant," Jasperneite explains. "I advise you to watch this one closely."

The conclusion of the Lerbach round:

"The threat potential of a euro exit will lead to further concessions at in Richtung Transfers", ist Gollits is convinced. This would reduce the risk of a euro crisis in the short term. "In the long run, however, this danger remains", meint Tripp. Reducing them would mean completely rethinking Europe. "If we want to take the populists' wind out of den Segeln, we have to vote on European integration and provide it with einem Preisschild", Voss makes clear. "It would also be progress if we thought about what should be organised centrally in Europe - border protection, defence, security - and what not, for example social affairs", meint Christian Jasperneite. Until then, Karsten Tripp concludes, the EU remains in a stalemate between centralist and nation-state forces. "The former are fed by threatening gestures from the USA and China - their motto is: 'Europe is our only chance - we can't do it alone.' The latter are supported by increasing European fatigue - their motto: "Brussels enslaves us, take back control.

The Lerbach round also ends with a conciliatory note when it comes to populism. "It is actually a meaningful corrective in a democracy and opens up the chance of a learning effect for the elites," says Jasperneite. "Perhaps in 20 years we will find out: Das was an unattractive phase, but it has led to more honesty and down-to-earthness."         ®

Author: Gerd Hübner


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