22/10/17: Italian North: another chip off Europe's Nirvana

Having just written about the Czech electoral pivot toward populism last night, today brings yet another  news headline from the politically-hit Europe.

In a non-binding referendums in two wealthiest Italian regions, Veneto and Lombardia, the voters have given local governments strong mandates to push for greater autonomy from Rome and the Federal Government. Both regions are dominated by the politics of Lega Nord, a conservative, autonomy-minded party with legacy of euro scepticism, strong anti-immigration sentiment and the past promotion of outright independence for the Northern Italy.

In both referendums, turnout was relatively strong by Italian standards (58% projected for Veneto and over 40% for Lombardia). And in both, exit polls suggest that some 95% of voters have opted for stronger regional autonomy.

The referendums were not about outright independence, but about wrestling more controls over fiscal and financial resources from Rome. Both regions are net contributors to the Italian State and are full of long run resentment over the alleged waste of these resources. Both regions want more money to stay local.

In reality, however, the vote is about a combination of factors, namely the EU policies toward Italy, the monetary conditions in the euro area, the long-term stagnation of the Italian economy and the centuries-old failure of Italian Federal State to reform the economy and the society of the Southern Italian regions. Italy today is saddled with stagnation, huge youth unemployment, lack of business dynamism, weak entrepreneurship, dysfunctional financial institutions, high taxes, failing and extremely heterogenous public services, collapsed demographics and centuries-old divisions. Some of these problems are european in nature. But majority are Italian.

Greater autonomy for wealthier regions, in my view, is a part of the solution to the long running problems, because it will create a set of new, stronger incentives for the Southern regions to reform. But in the end, it is hard to imagine the state like Italy sustaining its membership in the euro area without an outright federalization of the EU.

In the nutshell, within a span of few weeks, the dormant political volcano of the Europe has gone from stone cold to erupting. Spain, Austria, Czech, & Italy are in flames. Late-stage lava flows have been pouring across Poland, Hungary and the UK, Slovakia and parts of the Baltics for months and years. Tremors in Belgium, the Netherlands, Germany, (especially Eastern Germany) and Finland, as well as occasional flares of populist/extremist activity in other parts of the Paradise are ongoing. And, it is only a matter of time before populism resurges in France.

All of this with a background of stronger economic growth and booming markets. So wait till the next crisis/recession/market correction hits...

21/10/17: Prague Pages Brussels... Following Vienna

Just after Austria, the Czech Republic too has swung decisively in the direction of embracing populism as Populist billionaire's Eurosceptic party wins big in Czech Republic.

As Radio Praha describes it: "The Czech Donald Trump or Silvio Berlusconi, maverick millionaire, political populist, mould breaker; these are all labels that have been tagged on to ANO leader Andrej Babiš".

Jakub Patocka for the Guardian: "Open racism has become a normal part of public discourse. Trust in democratic institutions and the European Union has been crumbling before our eyes. It is shocking how easily and quickly this has happened. Many Czechs are going to the polls with grim fears for the future. A broad coalition of democratic parties is not likely to have enough votes to control parliament. Apart from the far right, communists and a peculiar Czech version of the Pirate party are expected to do well."

The headlines from Prague are sounding more like something the 'Kremlin-backed' news outlets would produce. Except, they are printed by the mainstream international media this time around.

But things are much worse than Babis and ANO victory and 29.8 percent of the vote implies. Four out of top five parties by voting results are now parties with populist leanings, far removed from the traditional Czech elites. The mainstream opposition conservative party, the Civic Democrats, are now a distant second with only 11.2 percent of the vote. Czech Republic's "most radical anti-migration, anti-Islam and anti-EU party, Freedom and Direct Democracy", came in the third place with 10.8 percent of the vote, statistically indistinguishable from the Civic Democrats. Another populist party - the Pirate party - is on 10.6 percent with a Parliamentary representation for the first time in its history. And the Communists got 7.9 percent. In simple terms, more than 59 percent of the voters have gone either extreme Left or extreme Right of the Centre, and backed populist politics.

Credit: Petr David Josek/Associated Press

In a recent paper, we explain how the trends amongst younger voters around the world are shifting away from support for liberal democratic values. These shifts are now starting to translate into votes.
Corbet, Shaen and Gurdgiev, Constantin, Millennials’ Support for Liberal Democracy Is Failing: A Deep Uncertainty Perspective (August 7, 2017): https://ssrn.com/abstract=3033949

15/10/17: Calling Brussels from Austria: Change Is Badly Needed in Europe

Austria just became a *new* flashpoint of European politics that can be best described as a slow steady slide into reappraisal of the decades-long love affair with liberalism.

In summary: the People's Party (OVP) has 31.4 percent of the vote, a gain of more than 7 percentage points from the 2013 election; the Freedom Party had 27.4 percent (a jump on 20.51 percent in 2013), and the Social Democratic Party, which governed in coalition with People's Party until today, had 26.7 percent (virtually unchanged on 26.82 percent in 2013).

The People's Party is best described as Centre-Right with a leaning Right when it comes to issues of immigration. Current Foreign Minister Sebastian Kurz, the leader of the People's Party is a charismatic 31-year old populist. He has driven his party further toward the Right position in recent months, as elections neared, and away from his post-2013 governing coalition partners, the Social Democrats. Kurz is, broadly-speaking a pro-EU candidate, with strong preference for more autonomy to member states. He is clearly not a Brussels-style Federalist.

The Freedom Party (FPO) was close to its record vote of 26.9 percent, achieved back in 1999, and now has a good chance of entering the government as a coalition partner to People's Party, for the first time in some 10 years. The FPO was in Government last in 2000-2007 and prior to that in 1983-1987.  It's last stint in Government earned Austria condemnation from the EU. Following the previous coalition, the OVP and the Social Democrats are not exactly best friends, which means that FPO is now in the position of playing a king-maker to the Government. That said, the coalition between OVP and FPO is still an uncertain: FPO leader Heinz-Christian Strache has accused Kurz and OVP of stealing his party's ideas during the election.

All in, almost 60 percent of Austrian voters opted to support anti-immigrant, Right-of-Centre positions. However, in recent years, Austrian Right has shifted away from anti-EU positioning, at least in public, and attempted to shed neo-Nazi tint to its support base.

Turnout in this election was impressive 79.3 percent, up on the 74.9 percent turnout last time around.

All in, Austrian election 2017 confirms the points established in our recent paper Corbet, Shaen and Gurdgiev, Constantin, Millennials’ Support for Liberal Democracy Is Failing: A Deep Uncertainty Perspective (August 7, 2017). Available for free at SSRN: https://ssrn.com/abstract=3033949. Together with Brexit, renewed uncertainty around Italian political shifts, Catalan Referendum, resilience of the Dutch euroscepticism, instability in core political strata in Germany, Polish and Hungarian populism, and so on - the developing trend across the EU is for a political / voter support drifting further to the extremes (Left and Right) of the ideological divide. In countries where this drift is coincident with rising power of populism, the results are starting to look more and more like validation of the far-Right (and with some time, the far-Left) as the leaders of the official opposition to the increasingly hollowed-out status quo parties.

12/1/17: Betrayal Aversion, Populism and Donald Trump Election

In their 2003 paper, Koehler and Gershoff provide a definition of a specific behavioural phenomenon, known as betrayal aversion. Specifically, the authors state that “A form of betrayal occurs when agents of protection cause the very harm that they are entrusted to guard against. Examples include the military leader who commits treason and the exploding automobile air bag.” The duo showed - across five studies - that people respond differently “to criminal betrayals, safety product betrayals, and the risk of future betrayal by safety products” depending on who acts as an agent of betrayal. Specifically, the authors “found that people reacted more strongly (in terms of punishment assigned and negative emotions felt) to acts of betrayal than to identical bad acts that do not violate a duty or promise to protect. We also found that, when faced with a choice among pairs of safety devices (air
bags, smoke alarms, and vaccines), most people preferred inferior options (in terms of risk exposure) to options that included a slim (0.01%) risk of betrayal. However, when the betrayal risk was replaced by an equivalent non-betrayal risk, the choice pattern was reversed. Apparently, people are willing to incur greater risks of the very harm they seek protection from to avoid the mere possibility of betrayal.”

Put into different context, we opt for suboptimal degree of protection against harm in order to avoid being betrayed.

Now, consider the case of political betrayal. Suppose voters vest their trust in a candidate for office on the basis of the candidate’s claims (call these policy platform, for example) to deliver protection of the voters’ interests. One, the relationship between the voters and the candidate is emotionally-framed (this is important). Two, the relationship of trust induces the acute feeling of betrayal if the candidate does not deliver on his/her promises. Three, past experience of betrayal, quite rationally, induces betrayal aversion: in the next round of voting, voters will prefer a candidate who offers less in terms of his/her platform feasibility (aka: the candidate less equipped or qualified to run the office).

In other words, betrayal aversion will drive voters to prefer a poorer quality candidate.

Sounds plausible? Ok. Sounds like something we’ve seen recently? You bet. Let’s go over the above steps in the context of the recent U.S. presidential contest.

One: emotional basis for selection (vesting trust). The U.S. voters had eight years of ‘hope’ from President Obama. Hope based on emotional context of his campaigns, not on hard delivery of his policies. In fact, the entire U.S. electoral space has become nothing more than a battlefield of carefully orchestrated emotional contests.

Two: an acute feeling of betrayal is clearly afoot in the case of the U.S. electorate. Whether or not the voters today blame Mr. Obama for their feeling of betrayal, or they blame the proverbial Washington ’swamp’ that includes the entire lot of elected politicians (including Mrs. Clinton and others) is immaterial. What is material is that many voters do feel betrayed by the elites (both the Burn effect and the Trump campaign were based on capturing this sentiment).

Three: of the two candidates that did capture the minds of swing voters and marginalised voters (the types of voters who matter in election outrun in the end) were both campaigning on razor-thin policies proposals and more on general sentiment basis. Whether you consider these platforms feasible or not, they were not articulated with the same degree of precision and competency as, say, Mrs Clinton’s highly elaborate platform.

Which means the election of Mr Trump fits (from pre-conditions through to outcome) the pattern of betrayal aversion phenomena: fleeing the chance of being betrayed by the agent they trust, American voters opted for a populist, less competent (in traditional Washington’s sense) choice.

Now, enter two brainiacs from Harvard. Rafael Di Tella and Julio Rotemberg were quick on their feet recognising the above emergence of betrayal avoidance or aversion in voting decisions. In their December 2016 NBER paper, linked below, the authors argue that voters preference for populism is the form of “rejection of “disloyal” leaders.” To do this, the authors add an “assumption that people are worse off when they experience low income as a result of leader betrayal”, than when such a loss of income “is the result of bad luck”. In other words, they explicitly assume betrayal aversion in their model of a simple voter choice. The end result is that their model “yields a [voter] preference for incompetent leaders. These deliver worse material outcomes in general, but they reduce the feelings of betrayal during bad times.”

More to the point, just as I narrated the logical empirical hypothesis (steps one through three) above, Di Tella and Rotemberg “find some evidence consistent with our model in a survey carried out on the eve of the recent U.S. presidential election. Priming survey participants with questions about the importance of competence in policymaking usually reduced their support for the candidate who was perceived as less competent; this effect was reversed for rural, and less educated white, survey participants.”

Here you have it: classical behavioural bias of betrayal aversion explains why Mrs Clinton simply could not connect with the swing or marginalised voters. It wasn’t hope that they sought, but avoidance of putting hope/trust in someone like her. Done. Not ‘deplorables’ but those betrayed in the past have swung the vote in favour of a populist, not because he emotionally won their trust, but because he was the less competent of the two standing candidates.



Jonathan J. Koehler, and Andrew D. Gershof, “Betrayal aversion: When agents of protection become agents of harm”, Organizational Behavior and Human Decision Processes 90 (2003) 244–261: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.11.1841&rep=rep1&type=pdf

Di Tella, Rafael and Rotemberg, Julio J., Populism and the Return of the 'Paranoid Style': Some Evidence and a Simple Model of Demand for Incompetence as Insurance Against Elite Betrayal (December 2016). NBER Working Paper No. w22975: https://ssrn.com/abstract=2890079