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Europe’s Other Populist Problem

The policies that European governments have pursued since the 2008 financial crisis have crowded out sorely needed structural reforms. But if European countries are going to keep their populists at bay, they will need to make the changes needed to deliver higher long-term growth.

WASHINGTON, DC – European voters, looking at Donald Trump’s chaotic presidency in the United States and the hard road ahead for a post-Brexit Britain, may be turning away from right-wing populists such as Marine Le Pen in France and Geert Wilders in the Netherlands. But if European governments are to keep their own populists at bay, they will need to implement the substantial structural reforms that are necessary to deliver higher long-term economic growth.

In their 1991 book, The Macroeconomics of Populism in Latin America, the late Rudiger Dornbusch of MIT and Sebastián Edwards of UCLA furnished the standard definition of economic populism. They describe it as “an approach to economics that emphasizes growth and income redistribution and deemphasizes the risks of inflation and deficit finance, external constraints, and the reaction of economic agents to aggressive nonmarket policies.”

According to Dornbusch and Edwards, economic populism can emerge when policymakers and citizens “are deeply dissatisfied with the economy’s performance.” In response, “[p]olicymakers explicitly reject the conservative paradigm and ignore the existence of any type of constraints on macroeconomic policy,” such that, “[i]dle capacity is seen as providing the leeway for expansion.” This then sets the stage for a populist program based on “reactivation, redistribution of income, and restructuring of the economy.”

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