Explain the AfD in terms of businesses and governments that are stuck in their ways, not in terms of ‘evil Europe’

A great deal has been written in recent days to explain the success of the neo-Nazi party Alternative für Deutschland in the state elections in Saxony-Anhalt. The most interesting, though not surprising, aspect of the ongoing debate is the ease with which responsibility is shifted onto others, following a populist pattern that has now become contagious. As is often the case, the favourite scapegoat of the political class – as well as the business community – is now Europe. The reasoning is simple. Saxony-Anhalt is one of the regions that has suffered most from the deindustrialisation affecting the continent. It is in these neglected regions that anti-democratic sentiment takes root and the traditional ruling class is rejected. The main blame for all this is laid at the door of Europe and its notorious policies, starting with the Green Deal. The automotive sector is often cited as an example of excessive European regulation and a lack of protection against ruthless Chinese competition. In short, at the heart of the European democratic crisis lies the inability to protect businesses. According to this argument, democracy must be defended through the reindustrialisation of Europe.

The argument is fascinating. It is, moreover, not dissimilar to that put forward by the MAGA movement, which cites the deindustrialisation of the Midwest as the root cause of all the ills of American democracy. The argument is, however, flawed in many respects. First and foremost, it is not true that industry is the bulwark of democracy. In Germany, as a recent Financial Times article shows, populist parties are strong in the heavily industrialised regions of the East, but less so in the western Länder. In other countries, such as France or the Netherlands, these anti-democratic movements are found mainly in rural areas and small towns. The phenomenon is therefore far more complex and depends not so much on the prevalence of a particular sector as on the backwardness of the economic and social fabric, which makes it difficult to adapt to technological change. This is a problem that will not disappear with the spread of artificial intelligence. Defending industry at all costs is therefore not a solution. On the contrary, it risks exacerbating the problem. This is also because the hardship caused by falling incomes and declining manufacturing employment – particularly in the automotive sector – does not stem from European constraints but from the inability of companies to keep pace with the competition. Chinese cars are not only cheaper but also of better quality, particularly in the more affordable ranges. China’s competitiveness stems from the substantial investments made to modernise production processes – which are now largely automated – and from the massive reduction in the workforce. Over the last twenty years, the Chinese manufacturing sector has lost around 18 million jobs.

In this context, the idea of remaining competitive whilst keeping the number of employees constant and subsidising outdated technologies has been, and remains, an illusion held by Europe’s political and business classes. Without an industrial and energy policy that incentivises innovation, European companies will continue to produce, using antiquated plant, goods for which demand is gradually declining. And this brings us to the crucial point. In Europe, industrial policy is the prerogative of national governments. These policies have been primarily geared towards rescuing companies in difficulty – often at the companies’ own request – rather than encouraging innovation and scale, as has been the case in China. State aid, whilst limited by EU rules, is managed with an eye to the past, rather than being used to foster competitiveness.

Social policies, which also fall within national competence, tend to prioritise job protection, even in sectors with no future prospects, rather than investing in human capital to utilise new technologies. Trade policy, on the other hand, falls within the EU’s remit, but for many years businesses – particularly German and Italian ones – opposed the introduction of selective tariffs against China, preferring to continue exporting to and investing in that country for as long as possible, even at the cost of transferring technology there. Now that Chinese technology has improved, European business leaders are calling for protection. The root cause of populism does not lie with European institutions and policies, but rather in the failure of governments and the business community to adopt policies that foster innovation and strengthen the social fabric to help the most vulnerable. Of course, it is easier to blame Europe for all the wrongdoings. Until now, this has been the populists’ favourite pastime. Now it has become that of the elites as well.