The resounding no vote in Italy’s December 4 referendum on constitutional reforms may open the door to an early parliamentary election that could bring the anti-EU Five Star Movement to power. In France, a victory by National Front Leader Marine Le Pen in the presidential election scheduled for May 2017 is possible as François Fillon, the conservative and neoliberal right-wing candidate, alienates left-wing voters.

Populism, fueled by the inequities of globalization and enhanced by Britain’s vote to leave the EU as well as Donald Trump’s election as U.S. president, is advancing fast and turning the postwar liberal world order upside down. Achieving strong, inclusive national-level growth to revive a declining middle class, raise incomes, and combat youth unemployment is now taking precedence over maintaining an open and innovative market-driven global economy in which all countries can compete and grow. This shift is an opportunity for Europe’s Left to step up and regain the political initiative.

Nationalist and populist political movements across Europe claim that domestic prosperity is now more important than supranational arrangements. The EU, which deprives its member governments of most policy tools to address their citizens’ needs, is a target.

This retreat from globalism and internationalism comes at a price. The United States will be reluctant to absorb the largest part of the cost of providing global public goods. Washington is likely to renegotiate the terms of its engagement in NATO, and collective security will be undermined.

Multilateralism is ceding its place to bilateral and regional trade and investment agreements. Developing countries that lack China’s economic muscle may suffer. Whereas these states found opportunities to grow and prosper under the old order, they will struggle to negotiate effectively on a bilateral basis.

In Europe, a return to nationalism could prove catastrophic. Old rivalries may resurface and fall prey to great-power games. Small and medium-sized European countries will find it difficult to compete in the globalized world economy and may seek refuge in old-time spheres of influence without the guarantees of existing supranational structures.

Opposing populism is not easy in the present political climate. As the Brexit debate has shown, rational arguments weigh less than identity politics—the fight of the masses against the elites who promulgate those arguments. It matters not what you say but who you are.

Moreover, in the stressed social climate produced by years of recession, neoliberal recipes—such as those proposed by Fillon—in the shape of mass firings from the public sector as well as wage and salary cuts could lead to upheavals that destabilize policies and governments.

This is where Europe’s Left has a chance to resurge from its present dire position and contribute to the fight against populism. There is space for a new third way that can lead to growth and prosperity while avoiding the risks associated with the alternatives. The new policy agenda should be grounded on the need to address the causes of the present discontent—economic stagnation and neglect of weaker social groups, particularly those that feel threatened by globalization and have been led to regard immigrants as the main source of their suffering.

The key is a return to growth. In Europe, innovation and entrepreneurship are alive but less vigorously supported than in the United States. Europe’s demographics make no contribution to potential output growth, given the continent’s low birth rates and opposition to immigration. Modern-day social democracy should continue to support open markets and improve the investment environment, particularly by encouraging small businesses and innovative ventures. The Left should avoid adopting tough stances toward immigration and focus on rationalizing inflows by introducing criteria that could help the growth process, particularly by filling gaps in skills.

The main challenge is fiscal policy. Putting an end to austerity is the easy part. Reducing taxes, boosting infrastructure investment, and promoting social welfare policies to support less privileged groups and redress the inequities of globalization—by taking care of dislocated workers and promoting retraining programs—are consistent with widely accepted policy messages.

However, pursuing ambitious fiscal policies is conditional on the removal of major financial constraints: excessive legacy debt and the sizable capital gaps that exist in several parts of the European banking system. Neither of these problems can be solved at the national level. Only further steps in fiscal and financial integration could provide the answers: credible schemes are needed for sharing the costs of debt redemption and the recapitalization of banks.

Specifically, this would involve converting the European Stability Mechanism, the eurozone’s bailout fund, into a European Monetary Fund with adequate capital; setting up a euro area budget with its own resources; creating a redemption fund for assuming past debt; issuing Eurobonds; and establishing a full-fledged European deposit insurance scheme.

In the framework that will be set by the new structures, the costs of debt redemption and bank recapitalization could be negotiated, to create a platform for launching a lasting European economic recovery. Completing the construction of the euro area by creating common fiscal structures and deepening the banking union must have a central position in the policy agendas of Europe’s center-left parties.

The feasibility of the project may be questioned, as the notion of more Europe is no longer popular, while implementation would depend on the support of France and Germany. However, after elections in the two countries in 2017, Paris and Berlin will be more likely to find common ground based on an understanding that the monetary union’s dysfunction condemns Europe to economic stagnation and a loss of global influence. The focus should be on how to make the eurozone work, rather than on grand designs.

It will be an uphill struggle, but worth it if the Left is determined to get the European economy back on course and respond effectively to the social discontent fueling populism.

 

Yannos Papantoniou is president of the Center for Progressive Policy Research, an independent think tank.