Economic austerity and the political environment

Anti-establishment and EU-skeptic parties have gained significant support since the Great Recession and the subsequent European Sovereign Debt Crisis. Higher vote shares for these parties have increased partisan conflict and led to more fragmented parliaments. Interestingly, the rise in support for extreme parties occurred during a period of significant fiscal policy interventions. In particular, several European countries, such as Portugal, have implemented large-scale fiscal consolidation measures to reduce high levels of public debt, thereby averting the risk of sovereign default. The massive reductions in public spending faced significant opposition and resulted in an anti-austerity movement.

In this paper, we study the political costs of fiscal consolidations. We assemble a novel regional dataset on election outcomes that provides detailed voting results on more than 200 elections covering 124 European regions from 8 countries (including Portugal). The figure presents the regional vote shares for extreme parties for the years 2007 and 2015, just before the start of the Great Recession and after the height of the Sovereign Debt Crisis. The figure shows that more extreme voting in the recent past is a shared phenomenon across countries and regions. Particularly strong increases in the vote shares of extreme parties can be observed for regions in France, Spain, and Italy. However, there are also significant differences across regions within the same country.

We further use our novel dataset to conduct an in-depth econometric analysis and indeed find that fiscal consolidations have detrimental political consequences: a 1% reduction in regional public spending leads to an increase in extreme and anti-establishment parties’ vote share of around 3 percentage points. The higher vote share captured by extreme parties can be explained by a fall in voter turnout together with an increase in the total votes for these parties. Thus, in response to fiscal consolidations, fewer people vote and those who do exhibit a higher tendency to vote for extreme parties. Both extreme-left and extreme-right parties experience higher voter support following fiscal consolidations. The rise in extreme parties’ vote share to fiscal consolidations is not an artifact of the turbulent period following the Great Recession, but rather describes a general pattern in the data.

Notably, austerity-driven recessions amplify the political costs of general economic downturns considerably by increasing distrust in the political environment. Voters seem to become much more skeptical about the political environment when the higher economic slack they experience is related to active policy interventions like fiscal consolidations. Given that voters might blame the government for part of the economic downturn, they tend to punish established parties and instead support more extreme ones.

Click here to go to the paper by Ricardo Duque Gabriel, Mathias Klein, and Ana Sofia Pessoa.