Slow Growth and Short Tails

Nouriel Roubini

DEC 31, 2013

Newsart for Slow Growth and Short Tails

NEW YORKThe global economy had another difficult year in 2013. The advanced economies’ below-trend growth continued, with output rising at an average annual rate of about 1%, while many emerging markets experienced a slowdown to below-trend 4.8% growth. After a year of subpar 2.9% global growth, what does 2014 hold in store for the world economy?

The good news is that economic performance will pick up modestly in both advanced economies and emerging markets. The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9%.

Moreover, so-called tail risks (low-probability, high-impact shocks) will be less salient in 2014. The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued.

Still, most advanced economies (the US, the eurozone, Japan, the United Kingdom, Australia, and Canada) will barely reach potential growth, or will remain below it. Households, banks, and some non-financial firms in most advanced economies remain saddled with high debt ratios, implying continued deleveraging. High budget deficits and public-debt burdens will force governments to continue painful fiscal adjustment. And an abundance of policy and regulatory uncertainties will keep private investment spending in check.

The outlook for 2014 is dampened by longer-term constraints as well. Indeed, there is a looming risk of secular stagnation in many advanced economies, owing to the adverse effect on productivity growth of years of underinvestment in human and physical capital. And the structural reforms that these economies need to boost their potential growth will be implemented too slowly.

While the eurozone’s tail risks are lower, its fundamental problems remain unresolved: low potential growth; high unemployment; still-high and rising levels of public debt; loss of competitiveness and slow reduction of unit labor costs (which a strong euro does not help); and extremely tight credit rationing, owing to banks’ ongoing deleveraging. Meanwhile, progress toward a banking union will be slow, while no steps will be taken toward establishing a fiscal union, even as austerity fatigue and political risks in the eurozone’s periphery grow.

In Japan, Prime Minister Shinzo Abe’s government has made significant headway in overcoming almost two decades of deflation, thanks to monetary easing and fiscal expansion. The main uncertainties stem from the coming increase in the consumption tax and slow implementation of the thirdarrow” of “Abenomics,” namely structural reforms and trade liberalization.

In the US, economic performance in 2014 will benefit from the shale-energy revolution, improvement in the labor and housing markets, and the “reshoring” of manufacturing. The downside risks result from political gridlock in Congress (particularly given the upcoming midterm election in November), which will continue to limit progress on long-term fiscal consolidation; a lack of clarity about the Federal Reserve’s planned exit from quantitative easing (QE) and zero policy rates; and regulatory uncertainties.

Emerging markets’ difficult year in 2013 reflected several factors, including China’s economic slowdown, the end of the commodity super-cycle, and a fall in potential growth, owing to delays in launching structural reforms. Moreover, several major emerging economies were hit hard in the spring and summer, after the Fed’s signal of a forthcoming exit from QE triggered a capital-flow reversal, exposing vulnerabilities stemming from loose monetary, fiscal, and credit policies in the boom years of cheap money and abundant inflows.

Emerging economies will grow faster in 2014 closer to 5% year on year – for several reasons. Brisker recovery in advanced economies will boost imports from emerging markets. The Fed’s exit from QE will be slow, keeping interest rates low. Policy reforms in China will attenuate the risk of a hard landing. And, with many emerging markets still urbanizing and industrializing, their rising middle classes will consume more goods and services.

Still, some emerging markets – namely, India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela – will remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions. Some of these countries – for example, Indonesia – have recently undertaken more policy adjustment and will be subject to lower risks, though their growth and asset markets remain vulnerable to policy and political uncertainties and potential external shocks.

The better-performing emerging markets are those with fewer macroeconomic, policy, and financial weaknesses: South Korea, the Philippines, Malaysia, and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America; Kenya, Rwanda, and a few other economies in Sub-Saharan Africa; and the Gulf oil-exporting countries.

Finally, China will maintain an annual growth rate above 7% in 2014. But, despite the reforms set out by the Third Plenum of the Communist Party’s Central Committee, the shift in China’s growth model from fixed investment toward private consumption will occur too slowly. Many vested interests, including local governments and state-owned enterprises, are resisting change; a huge volume of private and public debt will go sour; and the country’s leadership is divided on how quickly reforms should be implemented. So, while China will avoid a hard landing in 2014, its medium-term prospects remain worrisome.

In sum, the global economy will grow faster in 2014, while tail risks will be lower. But, with the possible exception of the US, growth will remain anemic in most advanced economies, and emerging-market fragility – including China’s uncertain efforts at economic rebalancing – could become a drag on global growth in subsequent years.

Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

Political insurgency

Europe’s Tea Parties

Insurgent parties are likely to do better in 2014 than at any time since the second world war

Jan 4th 2014

SINCE 2010 or so, the Tea Party, a Republican insurgency, has turned American politics upside down. It comes in many blends, but most of its members share three convictions: that the ruling elite has lost touch with the founding ideals of America, that the federal government is a bloated, self-serving Leviathan, and that illegal immigration is a threat to social order. The Tea Party movement is central to the conflict that has riven American politics and the difficulty of reforming budgets and immigration laws.

Now something similar is happening in Europe (see article). Insurgent parties are on the rise. For mainstream parties and voters worried by their success, America’s experience of dealing with the Tea Party holds useful lessons.

The squeezed, and angry, middle

There are big differences between the Tea Party and the European insurgents. Whereas the Tea Party’s factions operate within one of America’s mainstream parties, and have roots in a venerable tradition of small-government conservatism, their counterparts in Europe are small, rebellious outfits, some from the far right

The Europeans are even more diverse than the Americans. Norway’s Progress Party is a world away from Hungary’s thuggish Jobbik. Nigel Farage and the saloon-bar bores of the United Kingdom Independence Party (UKIP) look askance at Marine Le Pen and her Front National (FN) across the Channel. But there are common threads linking the European insurgents and the Tea Party. They are angry people, harking back to simpler times. They worry about immigration. They spring from the squeezed middle—people who feel that the elite at the top and the scroungers at the bottom are prospering at the expense of ordinary working people. And they believe the centre of powerWashington or Brussels—is bulging with bureaucrats hatching schemes to run people’s lives.

Mainstream politicians in Europe have tried to marginalise the insurgents, by portraying them as unhinged, racist or fascist. But it is not working, partly because many of the insurgents are making a determined effort to become respectable. UKIP, the FN and the Freedom Party (PVV) in the Netherlands could each win the most votes in European Parliament elections in May. In France, 55% of students say they would consider voting for the FN. The Progress Party has joined Norway’s government. Slovakia has a new far-right provincial governor. Count insurgents on the left, such as Syriza in Greece and the Five Star movement in Italy, and mainstream parties in Europe are weaker than at any time since the second world war.

The insurgency is doing well partly because the mainstream has done so badly. Governments encouraged consumers to borrow, let the banks run wild and designed the euro as the pinnacle of the European project. In the past five years ordinary people have paid a price for these follies, in higher taxes, unemployment, benefit cuts and pay freezes.

This newspaper is sympathetic to the Tea Parties’ insight that the modern state often seems designed to look after itself, rather than the citizens it is supposed to serve. It is true that the EU has no answer to the problem that minorities of voters in many countries feel it lacks legitimacy—a looming threat to the euro. But Europe’s insurgents go further than that.

When Geert Wilders, leader of the PVV, calls the Koran “a fascist book” and Islam “a totalitarian religion”, he is endorsing intolerance. When Ms Le Pen demands protection for French firms from foreign competition, she is threatening to impoverish her compatriots. When UKIP promises British people prosperity outside the European Union, but within a free-trade zone of its own devising, it is peddling an illusion. Increasing inequality and growing immigration are the corollary of technological progress and economic freedoms that most people would not willingly give up.

Such details do not detain Ms Le Pen who, with the swagger of a politician on the rise, predicts that she will be in the Elysée within a decade. That is highly unlikely, partly because national elections are less susceptible to protest votes than European elections are, and partly because as they get closer to power almost all Europe’s Tea Parties are likely to reveal themselves as incompetent and factional. Yet the insurgents do not need victory to set the agenda or to put up barriers to reforms. That is why Europeans need to see them off.

Honesty in all things

Attacking the insurgents as fascists worked when Hitler’s memory was fresh, but many of today’s voters rightly see it as mostly a scare tactic. Even as the mainstream demonises the insurgents, it also panders to them by adopting pale versions of their policiesagainst immigration, global finance and the EU. But the mainstream is inhibited by a sense of what is possible and an understanding of what is legal. So it ends up flattering the idea that something needs fixing, while seeming to lack the courage to do anything.

The lesson from America is that if Europe’s politicians do not want the insurgents to set the agenda, they need to counter their arguments. As long as Republican leaders have indulged Tea Party demands to put purity above the work of governing (for instance, by shutting down the federal government) they have sunk lower in the public esteem. The hardline positions of Republican candidates satisfy the party faithful but drive away undecided voters, costing the party Senate seats in recent elections and arguably the presidency in 2012. Politicians need to explain hard choices and dispel misconceptions. Europe’s single market is the source of prosperity: enlarge it. Workers from eastern Europe pay more into government coffers than they take out: welcome them. Politicians prepared to speak out will find that most citizens can cope with the truth.

Ultimately, though, the choice falls to voters themselves. The Tea Party thrived in America partly because a small minority of voters dominate primary races especially for gerrymandered seats. In elections to the European Parliament many voters simply do not bother to take part

That is a gift to the insurgents. If Europeans do not want them to triumph, they need to get out to the polls.

The World Economy’s Shifting Challenges

George Soros

JAN 2, 2014
Newsart for The World Economy’s Shifting Challenges

NEW YORKAs 2013 comes to a close, efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. All of the looming problems for the global economy are political in character.

After 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. And, judging from the public’s enthusiastic support, so would ordinary Japanese.

By contrast, the European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape. The stakes are high: Nation-states can survive a lost decade or more; but the EU, an incomplete association of nation-states, could easily be destroyed by it.

The euro’s design – which was modeled on the Deutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default. As a consequence of the crash of 2008, several member countries became over indebted, and risk premia made the eurozone’s division into creditor and debtor countries permanent.

This defect could have been corrected by replacing individual countries’ bonds with Eurobonds. Unfortunately, German Chancellor Angela Merkel, reflecting the radical change that Germans’ attitudes toward European integration have undergone, ruled that out. Prior to reunification, Germany was the main motor of integration; now, weighed down by reunification’s costs, German taxpayers are determined to avoid becoming European debtors’ deep pocket.

After the crash of 2008, Merkel insisted that each country should look after its own financial institutions and government debts should be paid in full. Without realizing it, Germany is repeating the tragic error of the French after World War I. Prime Minister Aristide Briand’s insistence on reparations led to the rise of Hitler; Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe.

The current arrangements governing the euro are here to stay, because Germany will always do the bare minimum to preserve the common currency – and because the markets and the European authorities would punish any other country that challenged these arrangements. Nonetheless, the acute phase of the financial crisis is now over.

The European financial authorities have tacitly recognized that austerity is counterproductive and have stopped imposing additional fiscal constraints. This has given the debtor countries some breathing room, and, even in the absence of any growth prospects, financial markets have stabilized.

Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.

As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.

In contrast to Europe, the United States is emerging as the developed world’s strongest economy. Shale energy has given the US an important competitive advantage in manufacturing in general and in petrochemicals in particular. The banking and household sectors have made some progress in deleveraging.

Quantitative easing has boosted asset values. And the housing market has improved, with construction lowering unemployment. The fiscal drag exerted by sequestration is also about to expire.

More surprising, the polarization of American politics shows signs of reversing. The two-party system worked reasonably well for two centuries, because both parties had to compete for the middle ground in general elections. Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neo-conservatives, that moved it to a far-right extreme. The Democrats tried to catch up in order to capture the middle ground, and both parties colluded in gerrymandering Congressional districts. As a consequence, activist-dominated party primaries took precedence over general elections.

That completed the polarization of American politics. Eventually, the Republican Party’s Tea Party wing overplayed its hand. After the recent debacle of the government shutdown, what remains of the Republican establishment has begun fighting back, and this should lead to a revival of the two-party system.

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. But there is a significant difference, too. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.

Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. The economy turned around on a dime.

In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. These developments are largely responsible for the recent improvement in the global outlook.

The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.

How and when this contradiction will be resolved will have profound consequences for China and the world. A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad.

The other great unresolved problem is the absence of proper global governance. The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syrianot to mention allowing global warming to proceed largely unhindered. But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely.

George Soros is Chairman of Soros Fund Management and Chairman of the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including The Alchemy of Finance and The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means.

Europe’s populist insurgents

Turning right

Parties of the nationalist right are changing the terms of European political debate. That does not guarantee them lasting electoral success

Jan 4th 2014


IN A café on a tree-lined boulevard in Montelimar, a southern French town best-known for its sticky nougat, Julien Rochedy is working on his speech. Young, fashionably bearded and sporting both a well-cut suit and a braided black bracelet, he might be finalising a business presentation, or the launch of a fashion brand. In fact, Mr Rochedy is preparing for a public meeting of the National Front, the right-wing party led by Marine Le Pen.

The National Front (FN) has no local office in Montelimar, nor any historical hold here. The town’s narrow streets carry no posters for the evening’s meeting. 

But in France’s 2012 presidential election, Ms Le Pen grabbed 21% of Montelimar’s first-round votemore than she did nationwide. So the FN is fielding Mr Rochedy as a candidate in the mayoral elections to be held in March. “I’ve come here a bit like a missionary,” he says cheerfully. That evening a few hundred people turn out, curious to hear Mr Rochedy and his star guest, Marion Maréchal-Le Pen, the 24-year-old niece of the party leader and one of the FN’s two deputies in parliament.

Mr Rochedy, author of a book on the decadence of the West and admirer of Nietzsche, is part of a phalanx of young candidates recruited to become the new face of the FN. Under Ms Le Pen’s thuggish father, Jean-Marie Le Pen, the party lurked reviled on the far right of politics. For his daughter, decontaminating the brand is part of a programme which she sees as preparing the party, in the past always a protest vote, for real power. Her anti-elitist, anti-Brussels, anti-immigrant stance is playing well with a significant fraction of her countrymen—as are similar messages from charismatic right-wing insurgents across the continent.

The voice of the people

In May voters across the 28-member European Union will elect 751 deputies to the European Parliament. Polls suggest that the FN could win a plurality of the votes in France. The United Kingdom Independence Party (UKIP) has similarly high hopes, as does the Freedom Party (PVV) in the Netherlands. Anti-EU populists of the left and right could take between 16% and 25% of the parliament’s seats, up from 12% today. Many of those votes will go to established parties of the Eurosceptic left. But those of the right and far right might take about 9%. And it is they, not the parties of the left, who are scaring the mainstream.

The response of the political establishment to a tide of anti-European populism which draws on anti-immigrant feeling and antipathy towards Islam has mostly been to evoke the 1930s and hope for revulsion to take its course. “We should not forget”, said José Manuel Barroso, head of the European Commission, “that in Europe, not so many decades ago, we had very, very worrying developments of xenophobia and racism and intolerance.”

It is true that some anti-EU parties are toxic. The most sinister is Golden Dawn, which holds 18 seats in the Greek parliament. Despite claiming to have moved beyond its neo-Nazi roots, the movement uses a swastika-like logo, plays the “Horst Wessel Liedat rallies, and puts its members through military-style training. Its leader, Nikos Michaloliakos, is in jail awaiting trial for association with a criminal gang after the murder of a left-wing anti-fascist rapper.

Squatting on the borders of respectability is Jobbik, now the third biggest party in Hungary’s parliament. Like many parties widely regarded as belonging to the far-right, it rejects the label in favour of “radical nationalist”. The party denies that it is racist or anti-Semitic; yet Marton Gyongyosi, one of its deputies, declared a year ago that it was time to draw up a list of Jews in parliament and government, on the ground that they represent a “certain national security risk”. He later apologised, but the damage was done.

To raise the spectre of a return to 1930s fascism, however, is “not the right question,” argues Catherine Fieschi, director of Counterpoint, a British think-tank. Most of Europe’s populist parties either have no roots in the far right or have made a conscious and open effort to distance themselves from such antecedents. A better question is how far these parties can use popular dissatisfaction to reshape Europe’s political debate, and whether they can use that influence to win real power.

That they are disparate there can be no doubt; they vary hugely according to local tastes, traditions and taboos. Take the FN and the PVV. Late last year their leaders, Ms Le Pen and Geert Wilders, began a political courtship with an eye to creating a new parliamentary group after the European elections. But the PVV is ardent in its support for Israel, while the FN has an anti-Semitic past. The PVV is in favour of gay marriage; the FN marches against it. The PVV sees Islam as a totalitarian danger around the world; the FN frets not over the religion’s basic tenets but only about the “Islamification” of France.

Elsewhere some on the populist right—Belgium’s Vlaams Belang, Italy’s Northern Leaguewant regional autonomy within the EU while othersUKIP and the Finns Partyreject EU membership outright. Those not stained by direct descent from a racist past distinguish themselves from those that are. That is why the FN does not sit in the Eurosceptic group in the European Parliament that UKIP and the Northern League belong to, and why a deal between the PVV and the FN could herald quite an institutional shake-up.

What they all have in common is that they are populist and nationalist, that they have strong views on the EU, immigration and national sovereignty, and that as a result they are doing very well in the polls.

Swaggering about

The euro-zone crisis, and its aftermath, goes some way to explaining why—but it is far from a complete answer. The populist right is nowhere to be found in austerity-battered Spain and Portugal. But it thrives in well-off Norway, Finland and Austria. Between 2005 and 2013, according to calculations by Cas Mudde, at the University of Georgia, there are almost as many examples of electoral loss for parties of the far and populist right (in Belgium, Italy and Slovakia, among others) as there are of gain (in Austria, Britain, France, Hungary, the Netherlands).

But if euro-zone economics are not a full explanation, the crisis has been crucial to setting the scene for the potent new pairing of old nationalist rhetoric with contemporary Euroscepticism. Across Europe disillusion with the EU is at an all-time high: in 2007 52% of the public said it has a positive image of the EU; by 2013 the share had collapsed to 30%

The new identity politics is a way of linking the problems of Europe and those of immigration. It also taps into concerns about the way globalisation, defended by the mainstream political consensus, undermines countries’ ability to defend their jobs, traditions and borders.

The parties play on a nostalgia for simpler times that appeals to some older voters; but their pitch also works well with younger voters for whom Europe’s dark past is the stuff of history textbooks, not their or their parents’ experience. Some of them are more comfortable voicing ideas that their elders either reject or pass over in silence; a study of Facebook fans of populist parties by Demos, a British think-tank, found that those aged 16-20 years were twice as likely as the over-50s to cite immigration as the reason for their support. Fully 55% of French 18- to 24-year-olds say that they would not rule out voting for the FN, according to a recent poll by the Union of Jewish Students in France.

Young or old, populist parties speak to an electorate which Dominique Reynié, an academic at Sciences-Po in Paris, sees as “existentially destabilised”: confused and anxious about what they belong to, where their country is heading, and whether their leaders can do anything about it. Most of these parties deny vigorously that in giving these anxieties voice they are merely acting as outlets for protest votes. But protest is nevertheless their theme. “We want our country back,” demands UKIP’s leader, Nigel Farage. “Less Europe, more Holland,” says Mr Wilders.

The problem the populist parties face is that when this sort of protest gains traction its themes can quite easily be grabbed by the mainstream right. When those parties move towards the populists, the populists risk getting swamped even as their messages become mainstream—or, if they attempt to keep a radical edge, being forced back on to the fringes. The tension between influence and power may make the parties’ growth self-limiting.

Populist parties that make it into national parliaments can further their agendas by deft horse-trading. From 2001 to 2011 the Danish People’s Party under Pia Kjaersgaard swapped parliamentary support for a succession of centre-right minority coalitions for tighter legislation on immigration. They can also hope to move beyond single issues and get into government. To the consternation of liberal Scandinavians, Norway’s nationalist-right Progress Party, which secured 16% of the vote at recent parliamentary elections, has been welcomed into a minority coalition government. Its leader, Siv Jensen—a sort of Norwegian Marine Le Pen, who talks about the “rampant Islamification” of Norway—has become the finance minister.

But even where mainstream parties rule out alliances, as France’s centre-right UMP does with the FN, the populist right can prompt established politicians to sound a tougher note, thereby legitimising some of the thoughts and vocabulary that once belonged only to the extremes.

The best example of how the new nationalism can pull the political debate in its direction by getting others to ape it is offered by UKIP. It has ten seats in the European Parliament (one of them Mr Farage’s) but none in Westminster; it secured just 3% of votes in the 2010 general election. Yet, as Heather Grabbe of the Open Society think-tank in Brussels points out, good poll numbers and impressive showings in by-elections have been enough to give its views potency, strengthening the hands of hardline Eurosceptics in the Conservative Party. As a result David Cameron, the Conservative prime minister, has promised a referendum on British membership of the EU. He also sounds an increasingly hardline note on immigration from the EU, and on the need to clamp down on “welfare tourism”. The opposition Labour Party, relaxed in the past about open borders, now promises to be tougher, too.

This success is largely Mr Farage’s. His canny deployment of saloon-bar blokeishness as common sense is the most potent tool of a party which lacks any strength-in-depth and is prone to chaotic squabbling behind the scenes. His importance is typical of the populist parties’ heavy reliance on one-man brands.

Mr Wilders in the Netherlands is the best example. With his distinctive thick silver mane, he is not just the face of the PVV: he is (rather oddly) its only registered member. In the ten years since he founded the party he has consistently courted controversy, calling Islam “a totalitarian religion” and the Koran “a fascist book”. In 2011 he was acquitted on a charge of incitement to racial hatred; he is himself undoubtedly hated by some, to the extent that he has a permanent security detail and unusually strict procedures for visitors. In the corridor outside his parliamentary office, two bodyguards sit on a black-leather sofa next to a potted plant; a poster of Margaret Thatcher hangs on the wall.

Mr Wilders exudes a focused self-confidence, sensing what he calls an “historical moment”: “I really believe that our generation of politicians can for the first time make a difference and get back what belongs to us, which is national sovereignty.” Today, the PVV has 15 seats in the 150-seat lower house of parliament, with a suite of offices there, and ten in the 75-seat Senate. Mr Wilders successfully used his party’s votes to back, and then let fall, a minority centre-right coalition government, and to secure a clampdown on immigration and asylum-seeking. Now he hopes to go further. “I think we have really the best chances of becoming the main party in the Netherlands,” he breezily declares.

Mr Wilders keeps a tight grip on party ideology—his blog and Twitter account are the party’s most direct way of communicating policy. And he is in complete control of its strategy. Thus the decision to invite Ms Le Pen to visit The Hague was his alone—and not, it seems, an easy one. A Zionist, Mr Wilders says that in the past he had considered it too big a risk to reach out to the FN, “and maybe it still is”. But having heard Ms Le Pen disown her father’s viewsJean-Marie Le Pen once referred to the Holocaust as a “detail” of history—he is taking her at her word.

Though this highly personalised form of politics has worked well so far, it hardly looks sustainable in the long term. The PVV has suffered several defections; two prominent ex-policemen who were among the PPV’s most visible and charismatic members of parliament said that they had had enough of Mr Wilders’s autocratic style. If popular parties are to survive their founders they need more conventional structures.

Ms Le Pen—who, like Mr Wilders, oozes confidence—is setting about doing just that. Like Mr Farage, she has little by way of an elected power base; the FN has only two deputies in the French parliament, and controls not a single town in France. Yet she has both the governing French Socialists and the opposition centre-right on the run. She is building on strength in the once-Communist industrial north, but also making a new push in southern towns like Montelimar—in October the FN won a stunning by-election victory in Brignoles, not that far away. Ms Le Pen’s ambition, she says with a wide grin, is to be “at the Elysée in ten yearstime”.

To “de-demonise” the party, she has rid it of its jackbooted types and denounced Nazism as an “abomination”. She rails not against Muslims but “Islamification”, drawing on deep-seated secular French principles to justify her condemnation of religious expression in public places. As a 45-year-old divorced mother of teenagers, Ms Le Pen gives the party a more modern feel by her presence alone. And when she speaks, she is heard by the public at large, not just followers at rallies. Whereas her father was treated by the media as a pariah, she is a frequent guest on news shows. “The image, or the caricature, of a movement of violent macho men has completely disappeared,” she insists.

Perfect perishers

The quest for respectability has been uneven. Ms Le Pen rejects outright the suggestion that there is anything racist about the party today. Yet the FN recently had to suspend one of its municipal candidates for posting a photomontage of Christiane Taubira, the black justice minister, next to that of a monkey on Facebook. Ms Le Pen herself once compared Muslims praying in the French street to the Nazi Occupation.

Her strategy also involves trying to deepen party expertise in a bid to earn policy credibilitynot a voters’ worry today, but possibly one tomorrow. She has recruited three graduates of the elite Ecole Nationale d’Administration to her team; the fact that she wants such énarques, and that there are énarques happy to work with her, signals seriousness. And she has lined up scores of young candidates, such as Mr Rochedy in Montelimar, to stand at municipal polls. The idea is to secure them local experience to prepare for bigger ambitions in the future.

Ms Le Pen seeks to resolve the tension between campaigning as an outsider and aspiring to govern by insisting that she is “not against the system”, only the cosy mainstream consensus: “The left and the right that says the same” and is in favour of globalisation and the euro. Another way to deal with the tension is not to move too fast. Sylvain Crépon, at Nanterre University, argues that the FN would be quite happy with limited electoral success this year: enough progress to look good, not so much as to end up mired in the messy compromises the exercise of power would bring.

Ms Fieschi at Counterpoint argues that the tension between the moderation needed for power and the outsider status that attracts a dispirited public makes such partiesfundamentally unstable” in a way that limits their growth. As Matthew Goodwin at Nottingham University points out, Austria’s Freedom Party imploded after it joined government in 2000 because it could not manage the conflict between protest and power. On this analysis, Europe’s populists may be near the height of their influence. Were the economy to recover and unemployment to drop, their message might fall on less receptive ground. Within the European Parliament, rivalry between them may thwart their high hopes for influence. Ms Le Pen sniffs that UKIP “is a bit too immature” to see beyond the caricature of her party.

For the time being, however, a battered Europe is fertile terrain. There is little sign yet of a sustained drop in joblessness, nor decisive economic recovery. Back in the Montelimar café, the patron turns out to be an FN supporter too. “We’re not a racist party,” he insists. His grudge, rather, is against Europe, the euro and the complacent leaders who “got us into this mess” in the first place.