As Populism Surges Globally, is it Fading in Central and Eastern Europe?

We are in the home stretch of what has been a record year for global elections, with roughly half of the world’s population heading to the polls.[i] As pivotal elections and their results play out across global economies, populism has become a central theme in many campaigns and headlines. Consequently, investors are weighing how various populist policies, with their diverse forms and ideological perspectives, might influence economic activity and market sentiment.

Recent developments in central and eastern Europe (CEE) offer an interesting perspective on the rise and potential decline of populism—and, perhaps, valuable insights for investors. While populism is often characterized as protectionist, nationalistic, or anti-elitist, the term often signifies a challenge to the status quo, regardless of its ideological leanings. CEE has been the epicenter of populism in Europe since the early 2010’s, particularly in Poland and Hungary, and later in Romania. We believe these countries provide compelling case studies because these populist movements have had time to evolve, revealing both their resilience and potential limits.

Populism: a brief definition

Populism typically frames itself as a movement championing "the people" against a real or perceived elite. This can manifest across the political spectrum. For example, in CEE, different flavors of populism took root after the transition from post-communist states to liberal democracies, with the global financial crisis exacerbating disillusionment with liberal economic reforms. In Hungary, Viktor Orban’s Fidesz party used populist rhetoric to gain a supermajority in parliament in 2010 by criticizing the previous Socialist government's economic mismanagement and vowing to protect national sovereignty. In 2015, Poland’s Law and Justice (PiS) party won parliamentary elections echoing similar themes, while the following year in Romania, the Social Democratic Party (PSD) pursued a left-wing version focused on income redistribution and growth, often downplaying concerns about fiscal discipline.

In our view, these examples highlight how populism can rise under different banners and ideologies but generally surfaces in response to perceived failures or dissatisfaction with existing governance models, whether economic, social, or political. As we look at these developments through a global lens, they offer something to consider on how similar dynamics might play out elsewhere.

The evolution of populism in CEE

Populist movements in CEE initially found fertile ground due to economic dissatisfaction and disillusionment with the effects of liberal economic policies. These policies, often associated with market liberalization, privatization, and fiscal austerity, were crucial in transitioning post-communist states into liberal democracies but also led to economic inequality and social discontent. However, recent events suggest that the hold of populist parties in the region may be weakening, in our view.

In Poland, the latest election saw the populist PiS party lose its parliamentary majority. While PiS remains the largest individual party, the rise of the center-right Civic Coalition has altered the political landscape. This shift had an immediate market impact, with the market pricing in the European Commission unfreezing €137 billion in EU funds[ii] that were previously withheld due to rule-of-law concerns. Polish assets rallied as a result. The Polish zloty in particular has outperformed free-floating CEE FX counterparts by about 800 percentage points in spot return since the October 2023 election.[iii] The Polish zloty has been one of the best-performing currencies in emerging markets, not only since the election, but year to date in 2024.[iv] We think these events underscore how political change has the potential to influence investor sentiment, especially in countries heavily dependent on EU funding.

In Romania, PSD came into power in 2016 with a left-wing populist approach focused on growth and income redistribution. Unlike the right-wing populism seen in Poland and Hungary, the PSD’s strategy did not emphasize opposition to the EU and a Brussels elite, but rather downplayed the risks of fiscal deficits, inflation and current account deficits while pushing for social spending and economic expansion.

PSD's governance proceeded to weaken institutions and acted as a drag on Romanian assets. PSD rule also saw a deterioration in Romania’s twin fiscal and current account deficits. This instability culminated in the 2019 imprisonment of PSD leader Liviu Dragnea for corruption, marking a significant blow to the party's hold on power and ushering in a period of political instability. Since November 2021, however, Romania has begun to shift away from populism as PSD formed a coalition with the center-right National Liberal Party (PNL). The formation of the coalition has ushered in a period of political stability and fiscal consolidation. As a result, the Romanian EMBI Global Diversified Index has outperformed similarly rated peer Hungary by more than 250 basis points on a spread return basis since the coalition has been formed.[v]

Hungary presents another interesting case, in our view. The ruling Fidesz party, long considered the face of right-wing populism in Europe, underperformed polls in June 2024 European parliamentary elections. Despite maintaining power, it lost a significant share of votes to a new party, Tisza, which campaigned on anti-corruption and transparency, aiming to repair Hungary's relationship with Brussels in order to unlock EU funds. Despite some similar policy positions to Fidesz, Tisza joined the EU’s center-right European People’s Party parliamentary group. While the group’s 30% position in parliament will not be enough to sway parliamentary elections in 2026, the pace of its rise is a potential threat to Fidesz. It remains to be seen whether Fidesz truly has a challenger in Tisza, but we believe the new party underlines a potential shift in political dynamics that could have long-term investment implications.

Lessons for investors monitoring 2024 elections

While it's too early to declare a definitive end to populism in CEE, recent trends suggest a recalibration may be underway, in our view. We believe these dynamics provide important food for thought as global markets navigate a year filled with significant elections and increasing populist pressures.

Political shifts, such as Poland’s and Romania’s recent changes in government, can dramatically alter investor sentiment. While the populist movements in CEE have unique characteristics, we also see shared traits with populist dynamics gaining momentum in other parts of the world. For investors, we believe that understanding the political context is crucial. In our view, the lessons from CEE remind us that while populism may offer short-term solutions to structural problems, its long-term consequences could limit its staying power.

[i] Source: World Economic Forum. https://www.weforum.org/agenda/2024/01/ai-democracy-election-year-2024-disinformation-misinformation/

[ii] https://ec.europa.eu/commission/presscorner/detail/en/ip_24_1222

[iii] Source: Bloomberg, as of 24 September 2024.

[iv] Source: Bloomberg, as of 24 September 2024.

[v] Source: Bloomberg, as of 24 September 2024.

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