In the last few months, investors have become very excited about the prospect of political change reviving stagnant economies and unleashing a new wave of growth. Donald Trump was going to waltz into the White House, overhaul America’s wildly uncompetitive tax regime, boost infrastructure spending to create jobs, and revive the manufacturing industry.
Emmanuel Macron is expected to sweep into office in a couple of weeks’ time with a mandate to reform the French economy and transform the eurozone into a transfer union that works for the whole continent and not just Germany. Theresa May, it is hoped, assuming she wins her early general election, will use Brexit as an opportunity to liberate business from the burden of EU regulation, strike new trade deals around the world, and rebalance the economy towards the regions.
But as we are beginning to see, there is a problem with that script. It is not going to work. In fact, populist political leaders are far more likely to deliver paralysis as they discover they are blocked from delivering on any of their campaign promises. It is this that should be worrying investors. Trump promised a lot, but in his first three months he has delivered very little. Tax reform? He doesn’t have the votes in Congress to deliver even a fraction of what he promised. Healthcare? The same. Infrastructure projects? Not a single digger has been deployed yet. Aside from ripping up a couple of trade agreements, Trump has not been able to do much for the economy.
It is not going to be very different in France, whoever is elected next month. The most likely winner remains the centrist Emmanuel Macron. But he is leading a new party that is not going
to win a majority in parliament. Even if he had any policies – and there is not much sign of them – he won’t be able to implement them. Marine Le Pen? She would probably find herself in the same fix. The net result will be paralysis. There will be lots of pledges of fundamental reform, and yet it’s likely that after a year or two nothing will have been done.
Something similar might be about to happen in this country. There are lots of things that could be done to improve the UK economy. But the next five years will be dominated by Brexit, even if May is returned to power. After years of negotiations, we will probably end up much where we started, with free trade across Europe and relatively high levels of immigration.
There is a common theme here. Across most of the developed world, populist politicians and parties have been rising in influence. They are either winning elections, or coming very close to doing so. But once they are in power, they can’t actually achieve anything. None of them have the depth of experience of governing or the broad-based political power bases necessary to make the levers of state work.
Elections have created a lot of excitement among investors. But none of what is promised is actually going to happen. For investors, there are two important lessons in that. First, ignore all the hype. There will be plenty of warnings about this or that happening if one populist leader or another gets voted into office, and how some markets will collapse and others soar. But once they are there, none of it will actually happen.
And secondly, concentrate on growing technologies, markets and companies – because unreformed economies led by paralysed governments are going to be very sluggish, and it will only be entrepreneurs with new ideas who will be able to deliver any kind of growth.