Ek 1: Bursiyer ve Programa Ait Bilgi Formu
Adı-Soyadı
Sözleşme No. TR2016/DG/04/A1-01/1067
Başvuru Yaptığı Sektör Üniversite (Kamu-Üniversite-Özel Sektör)
Başvuru Esnasında Bağlı Bulunulan Kurum Boğaziçi Üniversitesi
Başvuru Esnasında Bağlı Bulunulan Kurumdaki Öğrenci Unvan
Çalışma Alanı (AB Müktesebat Başlığı) Ekonomik ve Parasal Politika
Öğrenim Görülen Ülke Birleşik Krallık
Öğrenim Görülen Şehir Colchester
Programın Öğretim Dili İngilizce
Üniversite The University of Essex
Fakülte Sosyal Bilimler Fakültesi
Bölüm Hükümet
Program Adı Küresel ve Karşılaştırmalı Siyaset
Programın Başlangıç/Bitiş Tarihleri (PDS 04.10.2018 – 04.10.2019 belgesindeki tarihler)
Öğrenim Süresi (ay) 12
Avrupa Merkez Bankası Para Politikası ve Avrupa-şüpheci Tez/Araştırma Çalışmasının Başlığı Popülist Partilerin Yükselişi
Danışmanının Adı/Soyadı Thomas Winzen
Danışmanının E-posta Adres/leri [email protected]
NOT: Bu sayfa bilgisayar ortamında doldurulduktan sonra tez/araştırma raporu metnine ilgili sıra ile eklenmelidir.
Annex 1: Scholar and Programme Information Form
Name/Surname Burak Bulkan
Contract No. TR2016/DG/04/A1-01/1067
Sector as of the Application Date University (Public Sector-University-Private Sector)
Institution as of the Application Date Boğaziçi University
Title as of the Application Date Student
Field of Study (i.e. EU Acquis Chapter) Economic and Monetary Policy
Country of Host Institution The United Kingdom
City of Host Institution Colchester
Language of the Programme English
Host Institution The University of Essex
Faculty Faculty of Social Sciences
Department Government
Name of the Programme Global and Comparative Politics
Start/End Dates of the Programme (as in the PDS) 04.10.2018 - 04.10.2019
Duration of the Programme (months) 12
Monetary Policy of the European Central Bank Title of the Dissertation/ Research Study and the Rise of the Eurosceptic Populist Parties
Name of the Advisor Thomas Winzen
E-mail/s of the Advisor [email protected]
NOT: Bu sayfa bilgisayar ortamında doldurulduktan sonra tez/araştırma raporu metnine ilgili sıra ile eklenmelidir.
THESIS/RESEARCH REPORT APPROVAL PAGE
I have examined the dissertation/research report entitled
MONETARY POLICY OF THE EUROPEAN CENTRAL BANK AN THE RISE OF THE EUROSCEPTIC POPULIST PARTIES
presented by
BURAK BULKAN
and hereby certify that it is worthy of acceptance.1
22/09/2019
DR THOMAS WINZEN
University of Essex
1 The dissertation will be assessed and graded by two anonymous examiners and not by the supervisor. UNIVERSITY OF ESSEX
Monetary Policy of the European Central Bank and the Rise of the Eurosceptic Populist Parties
Burak Bulkan 1802996 MA Global and Comparative Politics Supervisor: Dr Thomas Winzen 06/09/2019
Word Count: 10690
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Contents i. List of Figures……….…..……………………………………….…………….….3 ii. List of Tables……………………………………….………………………….....4 iii. Acknowledgement…………………………………………………..……….…..5 iv. Abstract……………………………………………………………..……………6 v. Özet…………………………………………………………………..……….…..7 1. Introduction………………………………………….………………………..…8 2. Literature Review on Central Bank and Eurosceptic Populism………..…..…..11 2.1. Central Banks and Their Independence………….………………….....11 2.2. Central Banks vis a vis Populists…..………………………………...... 13 2.3. Eurosceptic Populism and Its Political Economy……………………...14 3. Theoretical Framework………………...………………………………..….….17 3.1. Populist or Pro-Populism Voter vs Monetary Policy of the ECB…….17 3.2. Economic Voting Behaviour………………………..………….……..20 3.3. Hypotheses……..…………...………………………………….……..21 4. Methodology and Research Design..……………….………………….……….24 4.1. General Method and Model Selection………………………..……….24 4.2. Dependent Variables………………………………..………………...25 4.3. Explanatory Variables…………………………………...……………28 4.4. Control Variables……………………….………...……...……………29 5. Results and Discussion…………………………………………………………31 5.1. National General Elections…………………………..……….……….31 5.2. European Parliament Elections……………………….……………….36 5.3. Further Analysis……………………...……………………………….41 5.4. Discussion…………..….…………………………….…………….….45 6. Conclusion……………………….……………………………………………..48 7. Bibliography…………………………………………………..……………..…50 8. Appendix. …………………………………………..………………………..55
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List of Figures Figure 1: Vote Shares of the Eurosceptic Populist Parties in the General Elections between 1998-2018……………………………………………………………….....27 Figure 2: Vote Shares of the Eurosceptic Populist Parties in the EP Elections between 1998- 2018…………………………………………………………………………………..27 Figure 3: Adjusted Predictions of the Interest Rate and Vote Shares in General Elections in the Fixed-Effect Model………………………………………….……………..32 Figure 4: Adjusted Predictions of the Interest Rate and Vote Shares in the EP Elections in the PCSE Model……………………………………………………..……………32 Figure 5: Adjusted Predictions of the Inflation Rate and Vote Shares in General Elections in the Fixed-Effect Model……………………………………………….………..35 Figure 6: Adjusted Predictions of the Inflation Rate and Vote Shares in the EP Elections in the PCSE Model….…………………………………………………….………35 Figure 7: Adjusted Predictions of the Interest Rate and Vote Shares in the EP Elections in the Fixed-Effect Model….…………………………………………………..……36 Figure 8: Adjusted Predictions of the Interest Rate and Vote Shares in the EP Elections in the PCSE Model….…………………………………………………………...…..37 Figure 9: Adjusted Predictions of the Inflation Rate and Vote Shares in the EP Elections in the Fixed-Effect Model….………………………………………………………..38 Figure 10: Adjusted Predictions of the Inflation Rate and Vote Shares in the EP Elections in the Fixed-Effect Model….….…………………………………...……38 Figure 11: Vote Shares of the Eurosceptic Populist Parties in General Elections with the Interest Rate and the Inflation Rate….….…………………………………………58 Graph 12: Vote Share of the Eurosceptic Populist Parties in the EP Elections with the Interest Rate and the Inflation Rate….….…………………………………………….58
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List of Tables Table 1: Vote Share of the Eurosceptic Populist Parties in General Elections Between 1998-2018……………………………………………………....………………………33 Table 2: Vote Share of the Eurosceptic Populist Parties in the EP Elections Between 1998-2018………………………………………………………………………………40 Table 3: Vote Share of the Eurosceptic Populist Parties in General Elections (Means).42 Table 4: Vote Share of the Eurosceptic Populist Parties in the EP Elections (Means)...44
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Acknowledgement I would like to express my sincere appreciation to my supervisor Dr Thomas Winzen for his valuable and priceless guidance and encouragement. He was always helping and available for my questions. I also would like to express my gratitude to Dr Alexandra Hennessy for her valuable contribution and guidance during the period of writing the dissertation. Also, I would like to express my special appreciation to the Jean Monnet Scholarship that made my study at the University of Essex possible in every aspect. This was a very important experience and acquisition for my academic career that I want to build. Additionally, I would like to present my thanks to the members of Jean Monnet Scholarship Program Office who were always helpful and available in any case.
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Abstract In the literature, the effect of the populist parties on central banks have been handled. However, this study will have a different approach to this relationship. It will investigate the relationship and the correlation between monetary policy of the European Central Bank (ECB) and vote share of the Eurosceptic populist parties by looking at the effect of monetary policy of the bank on vote shares of these parties in general and the EP elections between 1998 and 2018 in twelve European Union member countries. The study will provide empirical results for the effect of the bank on vote shares by checking the influences of the interest rate and the inflation rate on the preferences of the voters. Keywords: ECB, populism, Euroscepticism, interest rate, inflation rate, election
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Özet Daha önce literatürde, populist partilerin Merkez bankaları üzerindeki etkileri ele alınmıştır. Ancak, bu çalışma bu ilişkiye farklı bir yaklaşım sunacak. Çalışma Avrupa Merkez Bankası (AMB) para politikası ile Avrupa-şüpheci populist partilerin oy dağılımı arasındaki ilişki ve ilintiyi AMB’nin para politikasının bu partilerin 1998 ve 2018 yılları arasında on iki Avrupa Birliği üyesi ülkedeki genel ve Avrupa Parlamentosu seçimlerindeki oy dağılımı üzerindeki etkisine bakacak inceleyecek. Bu tez AMB’nin faiz oranı ve enflasyon oranının seçmen tercihindeki etkisini inceleyerek AMB’nin oy dağılımı üzerindeki etkisi hususunda ampirik sonuçlar sunacaktır. Anahtar kelimeler: AMB, popülizm, Avrupa-şüphecilik, faiz oranı, enflasyon oranı, seçim
7 MONETARY POLICY OF THE EUROPEAN CENTRAL BANK AND THE RISE OF THE EUROSCEPTIC POPULIST PARTIES
1. INTRODUCTION After the Global Crisis in 2008 and the Euro Debt Crisis in 2009, the discourse of the populist parties has become popular and attractive across the world. In Europe, most populist parties have started to be much more visible and audible in the literature. Most of them have already had a Eurosceptic characteristic, in different aspects, blaming or criticizing the European Union (EU) with its policies, structure and organs. The precautions recommended and taken by both the EU administrations and national governments, mostly fiscal austerity, have created unrest among people almost in all countries in the Union. Through the crisis and responses against the economic policy of the EU, while austerity policy was being the new political agenda, and social and economic inequalities are increasing as well as European integration is started to be seen as a failure for many, populist arguments and discourse began to call attention to people (Mudde and Kaltwasser, 2013, Kriesi and Pappas, 2018). Having looked at the general elections in some European countries, the significant electoral successes of populist parties seem in both the general and the European Parliament (EP) elections.
The European Central Bank’s (ECB) monetary policies are regarded as rigid and counterproductive by the populist parties aiming at pursuing pro-growth and short-term solutions (Bodea and Hicks, 2015). While the ECB policies are in favour of long-term solutions, the populist parties desire to solve the current economic problems by resorting to short-term solutions. Thus, the populists desire to change these policies by intervening the independence of the Central Bank. This desire is associated with the Eurosceptic sentiments and movements for the European populist parties (Grüner and Hefeker, 1999; Rogers, 2001).
As a main goal of the study, I will look at the relationship and correlation between the Eurosceptic populist (EuP) parties and monetary policy decisions led and operated by
8 the ECB and macroeconomic indicators by using the dataset that I created. In addition to some strong populist characteristics such as dichotomic viewpoint and anti- establishment attitude, these parties have various ideological idiosyncrasies such as nationalism or socialism. One of the most important properties is Euroscepticism, which means basically being against the Union and European integration at different levels. This study will focus on EuP parties’ electoral results in twelve countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) between 1998 and 2018. 1998 is the starting point for the study because it was the date when the ECB was established. Eleven out of twelve countries adopted Euro since its first day while Greece started to use Euro one year later.
Although the effects of the populists on the central banks is investigated by scholars, the reverse effect is not touched upon so much. In this study, I also purpose to direct the readers to contemplate the other way around. As mentioned before, especially the increase of vote share of the populists led the scholars to pay attention to this relationship. However, in my view, the potential and possible effects of the monetary policies of the central banks should not be neglected. Thus, I will attempt to call attention to that direction of the relationship between the central banks and the EuP parties. Therefore, this study will provide evidence for the EU-level monetary policy decisions are influential in the increase of the vote share of the EuP parties both in national and the Union level. The study will base on theories of populist voters’ preferences and macroeconomic populism as well as the theory of economic voting behaviour.
At the first point, I will handle the discussions and definitions as well as descriptions of phenomena or materials that are subjects of this study. While doing that, I will review the literature covering central bank independence and ideological standpoint and political-economic understanding of Euroscepticism as well as populism. After the literature review chapter, there will be a theoretical framework chapter that builds a theoretical background for the hypotheses of the study. The fourth chapter will be for the methodology and research design of the study. In this chapter, I will point out how I
9 collect the data and design the research as well as which method I apply. The study will employ panel data analysis to test four hypotheses because the dataset of the research includes both cross-section and time-series due to that I examine twelve countries and the period between 1998 and 2018. The fifth chapter will subsume evaluations of the results of statistical tests and discussion of the results. This chapter, through the discussion, will attempt to link the empirical results of the study and the literature and the theories. The study will show the interest rate and the inflation rate have very significant effects on vote shares’ direction of the EuP parties in general elections. In the EP elections, while the effect of the inflation rate is supported statistically, the effect of the interest rate is not found robust. Thus, the study will be able to say there is a statistically significant correlation between the monetary policy decision outputs of the ECB and vote shares’ direction of those parties after the robustness check.
10 2. LITERATURE REVIEW ON CENTRAL BANK AND EUROSCEPTIC POPULISM This chapter will firstly handle the concept “central bank” and its independence by basing on the sources in the literature and mentioning the duties of central banks. Immediately after, I will talk about the ECB and its missions and tasks in the system. The literature has focused on the effect of the populist politics on the central banks while I will check the reverse effect. Thus, this part will handle the relationship between central banks and populist parties even though this relationship has been mostly regarded as unilateral: the effects of the populist parties on central banks and their independence. Besides, populism, Euroscepticism and their political economy views will be treated because one of the most significant actors/agents in this study is the EuP parties because the EuP discourse – both left and right-wing - have gained momentum after the 2008 Global Crisis and 2009 European Debt Crisis. Thus, the interaction between the Eurosceptic populism and political economy will be handled in the current literature.
2.1.Central Banks and Their Independence In free-market economies, distribution of roles is institutionalized, and each institution carries on its task professionally and deliberatively for more effective economic structure and system. Perhaps, one of the most significant institutions is a central bank. The main task of a central bank in a free market economy is basically to implement monetary policy, in other words, to manage and control the currency, the money supply and the interest rates (Uittenbogaard, 2015). Apart from commercial banks, central banks hold a monopoly for the prerogative right of coining money and controlling money in circulation. The most crucial criterion for central banks in free-market economies is central bank independence. Indeed, the independence of central banks from political influences and manipulation has aimed at providing for more effective monetary policy. A central bank immune from political intervention emerged in the late 20th century as a critical property for banks. It was expected to bring “a considerable degree of price stability”, in other words, to keep price stability regardless of short-term political expectations (James 2012, p. 15). Thereby, central banks in democratic countries adopting free-market understanding carry on disciplinarian role which means
11 printing less money or lowering money supply growth as well as ensuring a stricter money demand by “reducing inflation expectation” (Bodea and Hicks, 2015, p. 35).
The ECB is one of the most important and influential central banks since it has certain critical authorities over the monetary policy of the Eurozone. By the Treaty of Maastricht, the ECB founded by replacing the European Monetary Institution in 1998 as the beginning of the third stage of the Economic and Monetary Union (EMU) of the EU which aimed at converging the member states’ economies in a common ground. Nonetheless, it did not have de facto power until the introduction of the Euro in 1999. Even though Eurozone member countries have their domestic central banks, they delegated some significant authorities and discretion to the ECB. This power delegation makes the ECB an essential institution and a constituent of the European Union (EU). Understandably, the main aim of the ECB is to maintain price stability within the Eurozone as designated in Article 2 of the Statute of the ECB (Statute of the ECB). Price stability is regarded “essential for economic growth and job creation” which are two of the EU’s objectives (ECB). The ECB can be regarded as the paragon of independent central banks across the world. Although it has some limited authority due to the intergovernmentalist structure of the EU, it holds very critical power.
Nevertheless, the age when we live through is called a “populist moment” because a lot of populist parties took the lead or gained a considerable amount of popular support in certain countries from the USA to Hungary, from Greece to Spain (Mouffe, 2018). A significant increase in voting rates of the populist parties has created a discussion about central bank independence because of discourses and promises of populist political parties. These populist parties state that the people directly elect them, and so they regard the superiority of elected ones than appointed ones and their decisions. At this point, it is critically important to handle the definition of populism to understand the relationship between the populist parties and central banks. At the centre of the discussion, there is the idea that general will or vox populi must prevail according to populists (Mudde and Kaltwasser, 2013, Masciandro and Passarelli, 2018). They believe that liberal institutions under liberal ideas such as separation of powers or checks and balances create obstacles for the prevalence of general will because they do
12 not prioritize the wish of people. The source of political repression on central banks can be explained by the notion that only they (populist politicians) represent the will of people and fulfil the needs of the public. Thus, in the literature, populist pressure on central bank independence has started to occupy a critical place. Although some Eurozone countries witness a critical increase of populist parties, the ECB seeks shelter from populist political pressure by its legal structure currently.
2.2.Central Banks vis a vis Populists In the literature, the academics have had interest with the possible effects of the populist/Eurosceptic parties or movements on the central banks, national or regional one, so far. This topic is still quite heated when we talk about the Federal Reserve (Fed) or some national central banks of European countries. While the vote shares of the Eurosceptic/populist parties increase and when they become the part of the governments, their influence over the monetary policy of the national central banks started to be perceived (Goodhart and Lastra, 2018; Rodrik, 2018a; Rodrik, 2018b). Indeed, the studies show how and why the Eurosceptic populists wish to take the central banks under their control. In line with their view of political economy, independence of a central bank seems a threat to realizing the economic “will of people”. Thus, independence of the central banks is always disputable status in the eyes of the populist/Eurosceptic parties and politicians.
Economists tend to prefer and adopt rules or delegate economic powers to autonomous technocratic agencies since they regard if politicians, tending to seek short-term interest due to their political agenda, control economic policy (Rodrik, 2018a). As a necessity and prerequisite of liberal democracy, institutions are expected to behave and take a decision autonomously within its given legal framework. The economic viewpoint of populism involves conflicts with the principles of liberal democracy allowing “free movement of labour, capital and goods and services between nations”; so, populists aim at restricting these movements to protect the interest of the people during the age of global financialization (Goodhart and Lastra, 2018, p. 50). The populist turn, after economic crises, started a significant pressure on central banks in accordance with the populist political economy. The financial burden and monetary policy of the ECB were
13 harshly criticized by the EuP parties during the election periods in different European countries.
During the Euro Debt Crisis, the EU played a very critical role by taking over responsibility to a certain extent. When the southern countries could not mitigate the effects of the Crisis and could not find a tangible solution to pay their debts, the European Commission (EC) and the ECB came together with the International Monetary Fund (IMF) to find new solutions, which is called Troika time to time. Even though the so-called Troika was not a formal organization or association, it has become the prime responsible for the period of response to the Crisis. The so-called Troika has been blamed because of its crisis management method including austerity policies, and this method has been regarded as one of the main components boosting populist discourse and EuP parties’ votes (Karanikolos et al., 2013; Flassbeck and Lapavitsas, 2015; Bourne and Chatzopoulou, 2018).
2.3.Eurosceptic Populism and Its Political Economy In this study, since vote shares of EuP parties are dependent variables, and since I will look at if there is an effect of the monetary policy and macroeconomic indicators in the Eurozone, I will handle term of Euroscepticism as well as populism. Firstly, Euroscepticism, like populism, contains both right-wing and left-wing movements as its constituents. Its most determinant property is positioning in the subject of European integration with all dimensions from economy to culture under the EU. To understand and grasp better the frame of the study in terms of political parties, talking about what/who is Eurosceptic with all dimensions will be very helpful and enlightening.
Euroscepticism is also used as an umbrella term, like populism, to cover and subsume almost all kind of opponent idea and standpoint against the regime or political agenda of the EU (Leconte, 2010; Boomgaarden et al., 2011; Leruth et al., 2018). Since it was coined in European politics, that term subsumed a lot of meaning and characteristics from anti-European integration and anti-EU immigrant policies. So, the term Euroscepticism does not refer to a narrow definition. Taggart and Szczerbiak (2002) conceptualized that term by splitting into soft and hard Euroscepticism. The former
14 refers to a type of Euroscepticism which does not contain “a principled objection to European integration or EU membership”; it connotes to opposition to the EU over some policy areas and national interest (Taggart and Szczerbiak, 2002, p. 7). The latter means a sort of Euroscepticism which owns “a principled opposition to the EU and European integration”; thus, it upholds that membership of the EU should be withdrawn (Taggart and Szczerbiak, 2002, p. 7.
In more detail, de Vries (2018) categorizes Euroscepticism in three types. These three types are comprised of policy scepticism, regime scepticism, and exit scepticism. The first one means scepticism for policies at the EU level, but it is in favour of the regime. The second one refers to scepticism for the regime or structure of the EU itself because they regard the way the rules operate not so positive. However, they still think to be a member of the EU remains benefits for their countries. The last one is the hardest type of Euroscepticism. Since they regard the policies and regime of the EU do not bring any advantage to their country and people, even they have negative effects, they assert that leaving the Union brings more advantages with a “more viable alternative political system”, namely the nation-state (de Vries, 2018, p. 9).
Furthermore, in the literature, the EuP parties are regarded as a voice of the EU citizens used against the mechanisms of the EU. A significant amount of the citizens regard that they can create a room for opposition within the EU (Mair 2007). In other words, voters are prone to keep the Eurosceptic parties as a second choice in their minds in a dissatisfactory case as an opportunity to make their voice heard to the EU (Krouwel and Kutiyski, 2018). The electoral victories or unexpected successes of the Eurosceptic parties have emerged not only in national elections but also in the European Parliament elections. These victories and successes are not always a result of the “static and homogenous opposition to the European project”, the Euroscepticism is changeable and contingent upon political and economic circumstances of a particular period (Krouwel and Kutiyski, 2018, p. 190).
Indeed, there are national differences, the EuP parties show some common characteristics in economic attitude. These parties have taken against anti-austerity
15 economic policies. Even though their stands show differences in line with their wings, they regard the austerity policies as a result of neoliberal policies which is beneficial to the elites (Mudde and Kaltwasser, 2012; Bourne and Chatzopoulou, 2018; Kneuer, 2019). While criticizing the EU’s attitude for political economy, they blame the EMU so that it abolishes the sovereignty of the member state over their national economies (Baimbridge, 2018, p. 430). Also, the alleged deflationary policy of the ECB instead of growth and employment is not demand of the people; rather, it is imposed by the political and economic elite (Baimbridge, 2018, p. 431). They assert that the economic opportunities that the EU’s economic system claimed to create by market liberalization have not been in favour of the citizens (Hobolt, 2005, p. 87). Both the refugee influx and the global financialization, in line with the parties’ political wing, constitute a threat for the economic stability and growth because of the incapacity of the EU organs in terms of dealing with these problems as well as the rigid monetary policy of the ECB in the eyes of the EuP parties (Serricchio et al., 2013).
16 3. THEORETICAL FRAMEWORK In this part, I will attempt to posit whether, and if yes how, the current and the most explanatory theories can be adapted for the results of this study. Because the study will check whether there is an effect of the monetary policy and macroeconomic developments on the EuP parties, the role of economic developments on the voting behaviour of citizens will have a very critical role in this part. At first, I will talk about the political preferences of populist voters about monetary policy and macroeconomic consequences while mentioning the economic model/understanding the ECB has followed as monetary policy. Hereafter, I will touch upon macroeconomic populism, which is sometimes applied even by mainstream parties. Macroeconomic populism draws a general understanding of the political economy of populist parties. Thus, examining macroeconomic populism becomes very enlightening and explanatory to understand the economic stand of the EuP parties between 1998 and 2018. As complementary theories to explain and examine the voting preferences and behaviours of those who vote for the EuP parties, I will discuss the theory of economic voting as the most explanatory theory. Following these, the hypotheses will be presented.
3.1.Populist or Pro-Populism Voter vs Monetary Policy of the ECB The ECB has taken the Bundesbank’s cue as a target of monetary policy. This policy has aimed at keeping the interest rate and the inflation rate lower and prioritizing lower inflation over growth and unemployment (Moravscik, 2012, p. 55). According to the Phillips curve, the inflation rate and unemployment have a negative relationship; thus, low inflation rate policy can be associated with a high unemployment rate in the mind of the citizens (Padoa-Schioppa, 2004, p. 17-18). However, the ECB have followed a different way for the monetary policy following the economic views weakening the Phillip curve’s hypotheses (Goodhart and Lastra, 2018, p. 51). Even though it is still disputable matter, there is a strong correlation between the interest rate and the inflation rate. For keeping the inflation rate under a certain amount, the interest rate (policy one) is used as a tool (Mundell, 1963, p. 280; Demary and Hüther, 2015, p. 350). However, the inflation rate the most Eurozone countries live through has reached zero and even negative values from time to time. In line with the monetary policy of the ECB, it is expected to boost the economic activity with a lower interest rate by cheaper credits
17 increasing investment (Bertelsmann Stiftung Report, 2017). This policy leads to an increase in wages and prices. However, the inflation policy of the ECB turned to pressure over the member states due to domestic political reasons. This situation weakened “confidence in the value of the Euro” and the EMU (Howarth and Loedel, 2003, p. 4). The low or zero inflation rate carries a danger which can cause a standstill and growth rates do not show adequate numbers. According to Balls et al. (2018), after the Global and especially the Euro Crisis, the central banks went beyond their policy rates. This created a dilemma for them between “inflation at the target and the economy at full capacity” (Balls et al., 2018, p. 7). However, the ECB’s policy has been still in favour of keeping inflation at the target while the trend of growth may subsume threats to price stability creating a jeopardization for the aims of the ECB (Roman and Bilan, 2012, p. 767). It was associated with the austerity policies during the Euro Debt Crisis.
Since it cannot be simply said the high or low interest rate is positive or negative for the economy as well as the inflation rate, the nature and dynamics of the Eurozone are very critical at this point. The dilemma in the nature of the relationship between the interest rate and the inflation rate is shown by being hypothesized. The higher interest rate is applied to deal with the higher inflation rate while the low interest rate is used to handle the low inflation rate (Taylor, 2018, p. 102). Such big economies like the Eurozone, suffers from the low inflation rate for a while; and to boost the inflation rate or to achieve the price stability, the ECB aims at pursuing the lower or even negative interest rate as monetary policy (Jobst and Lin, 2016, p. 4-5). The hypotheses will attempt to support that the voters in the Eurozone mainly regard the high interest rate and the low inflation rate as an economic failure; they desire to have the lower interest rate with high inflation rate. This understanding is based on the view that the higher interest rate is favourable for creditors while it has a reverse effect for debtors. Also, the lower and negative inflation produces economic cooldown; so, the higher inflation rate seems a propulsive force for the economy in the eyes of the European citizens (Grüner and Hefeker, 1999; Rogers, 2001).
Although there is no full-fledged theory to explain the voting preferences of those who vote for the populist parties, I can collect and summarize by looking at different and
18 consistent views. According to Guiso et al. (2017), the perception of economic insecurity is a very significant impetus for people to vote for the populist parties, which offer protection against the alleged sources of economic insecurities such as global financialization and immigration. Masciandre and Passarelli (2018) assume that populist voters are reluctant to regard the long-term consequences of macroeconomic policies. Therefore, voters take short-term economic consequences as an impulsion to vote for populist parties (Mughan et al., 2003, p. 7; Akkerman et al., 2014; Mudde, 2016, p. 25). When the conflict between inflation and employment generation as well as economic growth becomes severe, the independence of the central banks calls into doubt (Rodrik 2018a, p. 198). Under this circumstance, voters may support the politicization of monetary policy by the trigger of the populist parties. At this point, the EuP parties can fill the gap of the opposition mechanism at the EU level, while they can offer a non- mainstream economic policy at the national level (Mair, 2007; Henceroth, 2017; Louwerse and Otjes, 2019)
In practice, populist economic understanding can embody under the term macroeconomic populism. Dornbusch and Edwards (1990) coined macroeconomic populism, which indeed reveals and draws the general macroeconomic aims of the populist parties. According to this approach, macroeconomic populism refers to an economic view that “emphasizes growth and income distribution and deemphasizes the risks of inflation and deficit finance, external constraints and the reaction of economic agents to aggressive non-market policies” (Dornbusch and Edwards, 1990, p. 247). In this view, macroeconomic populism highlights growth through redistributive policies to enhance consumption, ignoring macroeconomic balance, particularly concerning inflation and fiscal deficit (Cortés, 2010, p. 99). Within this scope, (relatively high) inflation is regarded as a dynamic of economic growth because it leads to higher capital intensity resulting in higher growth (Fischer 1983). In contrast to inflation, the high interest rate does not have a positive effect on saving; instead, it “discourages productive investment” (Dornbusch and Edwards, 1990, p. 263-264). Against the fiscal austerity policy streams, during and after the economic crises, this approach is prone to leads to “higher levels of public debt, public spending, deficits, and crises” due to its growthism (Saint-Paul, 2019). Regardless of the results of macroeconomic populist
19 economic policies, in line with theories of economic voting behaviour, people who vote for populist parties tend to behave “rationally” when they regard and believe that monetary and fiscal adjustments in favour of them.
3.2.Economic Voting Behaviour Indeed, voting behaviour approaches rely upon the assumption that citizens have specific preferences and “vote in representative democracies to realize these to the greatest possible extent.” (Giebler and Regel, 2018, p. 8). Besides it, attitudes and behaviours of politicians occupy the centre idea of these theories as well as political events and issues. In accordance with the relationship between politicians’ attitudes and decisions and preferences of citizens, elections can be regarded as a kind of mechanism of reward-punish for politicians. There are multiple factors affecting the choices of citizens while rewarding or punishing politicians in this respect. The study will be mainly built upon the theory of economic voting behaviour that refers to that economic performance can be reward or punishment for the incumbent and opposition parties (Kramer, 1971; Markussen, 2008).
The effects of economic performances and developments on voting behaviour have been handled in different views. As one of the most retrospective theories, the sanctioning model correlates between economic performance and the future of government. In other words, when the economy is going well, voters are prone to rewarding the incumbent party and vice versa (Ferejohn, 1986; Kramer, 1971; Bartkowska and Tiemann, 2015). On the other hand, the selection model embarks on a prospective view. According to that model, voters pay attention to future developments, compare different political views and economic pledges in keeping with the Downsian model of spatial voting (Duch and Stevenson, 2008; Bartkowska and Tiemann, 2015). At this point, it is regarded that expectations about future economic developments and economic policies of political parties influence the voting behaviour of citizens. In line with this point of view, the economy is the most important source of motivation when citizens vote.
20 Under this contrast views, on the one hand, this study will control how the retrospective model works in some elections in Europe, especially after the crises. On the other hand, it will have a prospective view, through the selection model, because increase or decrease in vote shares of populist parties will provide some clues about the realignment between mainstream political parties and the EuP parties. However, since I will not include non-Eurosceptic populist parties’ vote shares, I will not be able to state that voters reward or punish incumbent parties in line with the sanctioning model. Nevertheless, an increase or decrease in the populist parties will show some clues at this point. Likewise, any unsuccessful economic performance could be punishing for the incumbent party and reward for a European populist party due to its economic policy program. In the study, since there will be no information about vote shares of incumbent parties, only EuP parties’ vote shares will say something about whether voters are rewarding these parties because of macroeconomic indicators.
3.3.Hypotheses Monetary policy decisions led and operated by the ECB play a very critical role as factors and determinants about the preferences and priorities of the citizens. The theory of economic voting behaviour focuses on rational and economic voting preferences of voters. Monetary policy decisions and macroeconomic indicators will be tested if these theories help to explain the EuP trend in Europe after the Great Recession and the Euro Debt Crisis. The second-order theory will be helpful to explain the vote increase of these parties in the EP elections to a certain extent. Considering the theoretical background of the study, I will test four hypotheses to find whether there are a relationship and correlation between monetary policy and decision as well as macroeconomic developments. Indeed, the first two hypotheses and the second two hypotheses will claim the same premises but in different electoral platforms: general and the EP elections. Since the dynamics and parameters show differences in terms of voting preferences of voters in these elections, the hypotheses will offer me to explain these differences more tangible. Therefore, the first and the second hypotheses that I will employ are as the following:
21 H1: The higher interest rate is more likely to increase vote shares of the Eurosceptic populist parties in general elections. H2: The higher interest rate is more likely to increase vote shares of the Eurosceptic populist parties in the EP elections.
Even though a higher or lower interest rate is not called as good or bad in general because it depends on specific economic conditions in contrast to the unemployment rate, the harmony of interest rate with the general and macroeconomic indicators such as inflation might be helpful to identify and diagnose of the effects of the level of interest rate. After the Global Crisis, the ECB has pursued the low interest rate policy including a bond-buying programme (quantitative easing) simply to deal with low inflation since 2013 and to bring it back to target (Bertelsmann Stiftung Report, 2017). During a crisis, central banks might be expected to decrease interest rates to enhance economic activity. As a macroeconomic rule, the low interest rate has been supposed to bring higher investment, accordingly, increase in employment, wages and prices. Thus, the ECB has chosen to use this method. However, since the inflation rate was stuck at zero percent in spite of low interest rate policy of the ECB, price stability in the Eurozone has been barely recovered.
H3: The lower inflation is more likely to increase vote shares of the Eurosceptic populist parties in general elections. H4: The lower inflation is more likely to increase vote shares of the Eurosceptic populist parties in the EP elections.
Indeed, inflation is, like interest rate, has both positive and negative effects on the economy. Higher inflation, at a certain level, decreases unemployment and preventing money hoarding and boasting loans and investment. On the other hand, it may increase the opportunity cost of holding money and cause an increase in prices because of shortages of goods; thus, investment and saving rates go down gradually or sharply in accordance with the inflation rate (Mankiw, 2002). In Eurozone, the ECB dealt with zero percent and even negative inflation rate for a while after the Global Crisis. Very low inflation affected consumers to be less incentive to spend money; also, zero percent
22 inflation could lead the entire economy to a standstill and cause deflation. Thus, to prevent this economic scenario and deal with its effects, the ECB implemented low interest rate policy as the monetary policy. In the direction of the populist political economy understanding, populist parties’ economic programs and discourses address relatively high inflation rate to boost economic activities and reduce unemployment. Therefore, populist parties tend to pursue higher inflation rate policy in line with their pro-employment and loose fiscal policy.
23 4. METHODOLOGY AND RESEARCH DESIGN 4.1. General Method and Model Selection In this study, I will mainly test the relationship between vote shares of the EuP parties and the elements of monetary policy and decisions of monetary policymakers as well as the macroeconomic indicators in general and the EP elections of twelve countries. Since monetary policy ties these countries’ economic and monetary policies via the Euro and the ECB, I have chosen these countries as election observations’ countries. For data collection, I resorted to mainly the OECD, the World Bank, the IMF and the Eurostat databases for independent and control variables such as interest rate, inflation rate and refugee population by country. For dependent variables (vote shares), I use primarily databases Nordsk Senter For Forskningsdata for European Election Database as well as databases and reports of websites of twelve countries’ ministry of internal affairs and website of the European Parliament as well as the Eurostat. Since I have created this dataset that I have used for this study, it is an original one.
To test the hypotheses, I will employ panel data analysis, by using Stata, which has the same cross-sectional units observed at different periods in time by combining cross- sectional and time-series, because the study has twelve countries’ populist EuP parties’ vote shares between 1998-2018. Panel data, indeed, provides appropriateness for correcting endogeneity, and it allows to control for variables which cannot be sometimes observed or measured like different applications and implementations across countries. Since the research aims at examining election results in a specific period and different countries, in other words, I have country-variant and time-variant values, panel data is the best option to analyse the results of regressions as the appropriate model type (Blundell and Matyas, 1992; Hsiao, 2007). Panel data analysis offers different independent models or approaches including the pooling model, the fixed-effects model and the random effects model. In this study, I will use the fixed-effect model and panel- corrected standard error in line with panel data analysis.
I will employ the fixed-effect model to consider cross-national variations and to enable match between observations in each cross-section and the same units (Garrett and Mitchell, 2001). Since the panel data used in the study has specific countries and time
24 period, the parameters are also expected to be fixed. In other words, the relationship and correlation between the dependent variable and independent variables are represented as the subject-specific means (Clotfelter et al., 2007; Gardiner et al., 2008).
Garry Solon (1984) notes that longitudinal or panel data may include serially correlated error terms because of inconsistency between the length of cross-section and time- series. When Nathaniel Beck and Jonathan N. Katz (1995) showed the analysis of panel data creates incorrect results in their research. The spatial and temporal properties of panel data can sometimes make “the use of OLS problematic”; so, the models for panel data can permit of spatially and temporarily correlated errors (Beck and Katz 1995, p. 634). As a measurement to prevent the emergence of the error, Beck and Katz developed and proposed panel-corrected standard error (PCSE) estimator, which has become very frequently referred one in quantitative studies of social sciences. In line with the proposition of Beck and Katz, I will apply to PCSE as the second model and will compare the results of two models in line with their features, advantages and disadvantages.
4.2.Dependent Variables To test if there is a correlation between the ECB monetary policy decisions and the EuP parties, I determine the vote shares of the EuP parties as the dependent variable (DV). This variable will cover the Eurosceptic populist parties’ vote shares of twelve Eurozone countries by including the general and the EP elections regardless of their political wing (right or left one); their vote shares and the rise and fall are seen in Figure 1 and 2 both in general and the EP elections. In accordance with the hypotheses of the research, DVs change; so, there are two DVs for each test which examines vote shares of the EuP parties in general elections and the EP elections. The first, and main, reason of choosing these twelve countries lies behind the fact that eleven out of twelve countries are members of the Eurozone since its first day when the Euro was introduced to the markets in 1999 by replacing European Currency Unit (ECU). Greece also adopted Euro as currency before 2002 when the Euro started to be used physically and replaced all national currencies of Eurozone countries.
25 The selection of the EuP parties is mostly based on the current literature.1 However, in general, a EuP party carries some characteristics showing - Reference to two homogenous groups, the people and the elite; - The antagonistic relationship between these two groups - Dignification of the popular sovereignty/will - Introducing the EU and its organs as a threat to national sovereignty - Criticizing the EU economic policies as being an obstacle to the growth of the national economy (Kriesi and Pappas, 2015; Mudde and Kaltwasser, 2013; de Vries, 2018).
At this point, I do not include all Eurosceptic parties in the countries which I have chosen to observe. Basically, the fact that Euroscepticism or populism does not make each other necessary is why I have to eliminate and neglect some only Eurosceptic or only populist parties (e.g. Forza Italia or some communist parties). I follow this method because I look at the relationship between monetary policy and macroeconomic indicators and the EuP parties. Since these countries do not hold the general elections or the European Parliament elections every year, I have to repeat the election results for the EuP parties until a new one. The time range covers between 1998 and 2018. Why I have chosen 1998 as dies a quo is that the ECB was established in this year. The general election and the European Parliament election results will not be used in the same regression because there are different parameters, preferences and preliminaries for the citizens when they vote for the political parties. To understand and reveal the segregation in the eyes of the voters, I prepare employing two different regression models, which while the first one is including the general elections, the second one is employing the European Parliament election results.
1 Indeed, the full list of the EuP parties included by this study will be offered in the Appendix
26 Figure 1: Vote Shares of the Eurosceptic Populist Parties in the General Elections between 1998-2018
Austria Belgium Finland France 60 40 20 0
Germany Greece Ireland Italy 60 40 20 Vote Share 0
Luxembourg Netherlands Portugal Spain 60 40 20 0 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 Year Graphs by country
Figure 2: Vote Shares of the Eurosceptic Populist Parties in the EP Elections between 1998-2018
Austria Belgium Finland France 40 30 20 10 0
Germany Greece Ireland Italy 40 30 20 10 Vote Share 0
Luxembourg Netherlands Portugal Spain 40 30 20 10 0 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 Year Graphs by country
27 4.3.Explanatory Variables Independent variables (IV) will be indeed explanatory variables because there is no chance to change the values of elements. I employ not only elements of monetary policy and monetary policymakers’ decisions but also the data of macroeconomic developments and indicators in twelve countries and the Eurozone. I will not take the EU-level values because I will concentrate on the countries using the Euro as their currency. Through this method, I plan to show how the country-level and Eurozone- level monetary policies and monetary factors have become effective in the vote shares of the EuP parties between 1998-2018. Furthermore, the IVs of the research will be in three categories. The first one will subsume monetary policy elements and apparatuses to see the level of correlation between election results and the monetary policy decisions. The second category will cover other macroeconomic indicators to control the effects of macroeconomic developments on election results; the third one will subsume non-economic indicators. The independent variables contain firstly long-term interest rate both at the national and regional level. Interest rate is a very important tool controlled and directed by central banks to protect the price stability in countries, or in the Union. Even though the influence of low and high interest rate depends on where it exists, the ECB has decided to pursue the low interest rate to revive the economy and achieve its inflation rate target since 2013. Additionally, investment is encouraged or discouraged by the long-term interest rate.
As a second IV, I will designate the inflation rate, which is one of the most critical indicators showing the situation of price stability both in the countries and in Eurozone. Central banks are expected to take some precautions reducing inflation or keeping it low by its apparatuses. However, while doing that, they can encounter with some political, economic and social obstacles, objections or oppositions. Some of these objections or oppositions can seem in the voting decisions and preferences of citizens during the election period. According to the Phillips Curve, there is a negative correlation between unemployment and the inflation rate; governments can achieve lower rates of unemployment through a higher rate of inflation (Padoa-Schioppa, 2004, p. 17)
28 The third IV is money supply (M3), which is a key factor in affecting the inflation, price level and the exchange rate (New York FED, 2008). In line with this connection, the money supply is regarded as a tool of monetary policy because of the relationship between long-term price inflation and growth in money-supply (Friedman, 1987, p. 16- 17). Thus, even though money supply is not part of hypotheses, it is expected to have an effect on vote shares of the parties. M1 (narrow money) and M3 (broad money) are held as regressor as an indicator of monetary policy decisions.
The fourth one is the exchange rate between the Euro and the US Dollar. The exchange rate is used as a tool for macroeconomic populism. The exchange rate is considered in the evaluation for foreign investment, trade capacity and budget-trade deficit (Huang and Terra 2016; Rodrik 2018b). Especially the central banks can affect the exchange rate through the interest rate.
4.4.Control Variables I will also use economic and non-economic variables as control one. Macroeconomic- fiscal variables are also included the (harmonized) unemployment rate, real GDP growth, government debt-to-GDP and the government spending. These variables constitute macroeconomic developments, which are expected to influence voting behaviour and preferences of people in accordance with the theory of economic voting behaviour and macroeconomic populism. Especially the unemployment rate is affected by monetary and fiscal policy mechanisms and apparatuses. Monetary and fiscal policy decisions and manoeuvres increase or decrease short-term growth that increases or decreases, as well, the demand for labour by employees. Especially the inflation rate, as presented some recent research, has a negative relationship with unemployment rate; in other words, while inflation goes up, the unemployment rate goes down (Gali, 2010). Besides with monetary policy indicators, fiscal policy ones will take part as economic control variables in regression models. Also, I create a dummy variable for the Euro Debt Crisis that is assumed as the trigger for the soaring EuP votes. After 2009, the years are coded as 1 demonstrating the existence of the crisis.
29 Another dummy variable is the refugee crisis, especially because of the Syrian Civil War, but including not only Syrian refugees. After 2014, all years are coded as 1 denoting the existence of the crisis. In the literature, immigrants and refugees are seen as one of the main elements influencing vote increase of right-wing populist parties (Ding and Hlavac, 2017; Chen, 2019). On the other hand, trust in the ECB among the citizens is determinant for the existence, level and severity of Euroscepticism. Besides with it, support in Euro as a single currency is a reaction of the EU citizens to monetary policy decisions of the EU, especially the ECB, and macroeconomic indicators across the Union.
These variables will be included to the regression step by step in accordance to their groups such as monetary one or other economic one. While, firstly, only monetary policy variables will be tested for their effects, the other will be subsumed, and they comprise the models in the regression tables to explain the correlation and the relationship.
30 5. RESULTS and DISCUSSION 5.1.National General Elections Each model will be duplicated as a fixed-effect model (I) and a PCSE model (II), respectively. Thus, every 1, 3 and 5 numbers are the fixed-effect model, 2, 4 and 6 numbers represent the PCSE model. Table 1 reports the regression results for national general elections. Firstly, the first two models, in Table 1, will include only monetary variables as regressors. Model 3 and Model 4 involve Monetary and other macroeconomic regressors (like fiscal policy) while excluding three non-economic variables. Model 5 and Model 6 count non-economic variables in the regression. In Table 1, the coefficients of the interest rate are always positive but not always significant as a factor for vote shares of the EuP parties in national general elections. Positive and significant coefficients in four models, Model 2, 4, 5 and 6 provide support for Hypothesis 1 at different significance level. With non-economic regressors, the interest rate is more robust in Model 2, with 1 percent level; however, with non- economic variables, it loses its significance level. Concerning R-squared, which shows the proportion of the variance in the dependent variable obtained from the independent variables for prediction, Model 5 offers more dependable result with 5 percent significance level for the interest rate. According to this model, an increase in the interest rate leads to an increase in vote shares of the populist parties by 0.636 points. However, when autocorrelation is considered, Model 6 gives more significant result for the interest rate while the significance level of the inflation rate remains stable. Thus, both two models support Hypothesis 1. The effect of the interest rate on vote share can be seen in Figure 3 and 4, in accordance with the fixed effect and the PCSE model, respectively.
31 Figure 3: Adjusted Predictions of the Interest Rate and Vote Shares in General Elections in the Fixed- Effect Model 30 25 20 Vote Share 15 10 5 -2 8 18 Interest Rate
Figure 4: Adjusted Predictions of the Interest Rate and Vote Shares in the EP Elections in the PCSE Model 40 30 20 Vote Share 10 0 -2 8 18 Interest Rate
32
Table 1: Vote Share of the Eurosceptic Populist Parties in General Elections Between 1998-2018 Vote Share in General Elections Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Interest Rate 0.781*** 0.851** 0.585 0.820** 0.636* 0.931** (0.234) (0.271) (0.307) (0.311) (0.311) (0.326)
Inflation Rate -1.502*** -1.478*** -1.085* -1.370** -1.094* -1.074* (0.345) (0.413) (0.450) (0.448) (0.464) (0.480)
Money Supply 0.256*** 0.260*** 0.213*** 0.228*** 0.135* 0.167** (0.0256) (0.0263) (0.0453) (0.0400) (0.0646) (0.0564)
Exchange Rate 17.55*** 17.72*** 12.29** 15.56*** 5.755 7.070 (4.053) (4.025) (4.481) (3.932) (6.487) (5.546)
Unemployment 0.511* -0.142 0.511* -0.116 (0.239) (0.146) (0.239) (0.162)
Real GDP Growth 0.114 0.207 0.0496 0.135 (0.198) (0.182) (0.204) (0.193)
Debt Ratio to GDP 0.0116 0.0306* 0.0220 0.0194 (0.0428) (0.0138) (0.0431) (0.0145)
Gov. Spending -0.360* 0.121 -0.373* 0.132 (0.172) (0.0936) (0.174) (0.0951)
Economic Crisis 1.263 1.034 3.382 0.645 (1.863) (1.568) (2.124) (1.736)
Confidence in ECB 0.118 -0.0727 (0.0738) (0.0440)
Support for Euro 0.0178 -0.0328 (0.0643) (0.0491)
Refugee Crisis 2.832 4.501* (2.356) (2.119)
Constant -21.53*** -22.29*** -2.708 -25.83** 0.0204 -9.330 (5.350) (5.329) (11.96) (8.584) (14.14) (10.38) r2 0.432 0.330 0.466 0.352 0.476 0.367 N 252 252 252 252 252 252 df_m 15 4 20 9 23 12
Standard errors in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001
Unlike the interest rate, coefficients of inflation rate are always negative while they are also statistically significant in association with vote shares of the parties in each model.
33 When I do not add non-economic variables to the regression, the inflation rate is more robust in model 2 at 0.1 percent level. Also, it has much stronger coefficients in this model. As long as other economic and non-economic regressors are counted in, significance levels of inflation rate decrease even though its negative effect and significance remain. According to Model 5, the inflation rate is positively significant at 5 percent; and it offers support for Hypothesis 2. According to Model 5, a decrease in the inflation rate would increase vote shares of the parties by 1.094 points. On the other hand, Model 6 supports Hypothesis 2 with 5 percent significant level; so, a decrease in the inflation rate is reacted by 1.072 points. When they are compared, I recognize that the negative effect of the inflation rate is more robust than the positive impact of the interest rate. The correlation between vote shares and the inflation rate are seen in Figure 5 and 6, as the fixed-effect and the PCSE model in order.
At the same time, (broad) money supply (M3) is positively significantly influential on the direction of vote shares of the parties. Even though it is less robust when non- economic variables are included in Model 5 and Model 6, it becomes much more robust in the first four models. It is more robust in Model 2 than the first three models in accordance with its coefficient. In the first four models, the increasing effect of the exchange rate between the Euro and the USD is positively significant while it is more robust in Model 2. However, when non-economic factors are rendered, it loses its significance entirely. Negative coefficients of the unemployment rate are not significant, whereas its positive coefficients are statistically significant in Model 1, 3 and 5. When non-economic regressors are counted in, its coefficients show a decrease to a certain extent while its significance level remains stable in Model 5 at 5 percent level. Also, according to Model 4, while the debt ratio to GDP increases, it is more likely to vote for the EuP parties in the eyes of the citizens. On the other hand, government spending has a significantly negative effect on vote shares of the EuP parties at 5 percent level in Model 3 and 5. When non-economic factors are in regression, its coefficient shows an increase in Model 5. While the table does not show any significance of dummy variable of the existence of the economic crisis, Model 6 points out that dummy variable of the refugee crisis is positive and statistically significantly associated with vote shares of the populist parties at 5 percent level.
34
Figure 5: Adjusted Predictions of the Inflation Rate and Vote Shares in General Elections in the Fixed- Effect Model 20 10 0 Vote Share -10 -20 -2 8 18 Inflation Rate
Figure 6: Adjusted Predictions of the Inflation Rate and Vote Shares in the EP Elections in the PCSE Model 20 10 0 Vote Share -10 -20 -2 8 18 Inflation Rate
35 5.2.European Parliament Elections As in national general elections, six models for the EP election results will be presented in Table 2. First two models do subsume only monetary variables while the second two models involve fiscal, naturally economic, variables and exclude non-economic ones. Model 5 and 6 will cover non-economic variables as well. On the contrary to Table 1, the interest rate has both positive and negative coefficients in different models. It is significant when it only has positive coefficients. In Model 2 and 4, its significance level is 5 percent. However, if non-economic variables are included, it loses its significance. If Model 5 is considered as the most reliable one, there is no statistical support for Hypothesis 3, and it can be rejected. Yet, the correlation between vote shares and the interest rates can be seen in Figure 7 and 8.
Figure 7: Adjusted Predictions of the Interest Rate and Vote Shares in the EP Elections in the Fixed- Effect Model 20 15 10 Vote Share 5 0 -2 8 18 Interest Rate
36 Figure 8: Adjusted Predictions of the Interest Rate and Vote Shares in the EP Elections in the PCSE Model 30 25 20 Vote Share 15 10 5 -2 8 18 Interest Rate
When coefficients of inflation rate are examined, it is noticed that inflation rate always has a negative and statistically significant effect on vote shares of the EuP parties in the EP elections like in Table 1. When only Monetary variables exist in regression, its significance is at 1 and 0.1 percent level in Model 1 and Model 2, respectively. In the case that Fiscal variables get involved in the regression, significance levels follow the same percent levels in Model 3 and Model 4 in turn. In Model 5 and Model 6, the significance level of the inflation rate is at 5 and 1 percent in order. Vis-à-vis the interest rate, coefficients of the inflation rate are much stronger than ones of the interest rate. According to that model, a decrease in the inflation rate leads to an increase in vote shares of the EuP parties by 0.997 points. Figure 9 and 10 show the correlation between the inflation rates and vote shares of the EuP parties.
37 Figure 9: Adjusted Predictions of the Inflation Rate and Vote Shares in the EP Elections in the Fixed- Effect Model 20 10 0 Vote Share -10 -20 -2 8 18 Inflation Rate
Figure 10: Adjusted Predictions of the Inflation Rate and Vote Shares in the EP Elections in the Fixed- Effect Model 20 10 0 Vote Share -10 -20 -2 8 18 Inflation Rate
38 As in the regression results for national elections in Table 1, money supply (M3), is always positively statistically significantly correlated with populist vote shares in the EP elections at all. When all models are compared, it is more robust in Model 6 with its coefficient and significance at 0.1 percent level. According to Model 1, less unemployment rate increases vote shares of populist parties; Model 2 shows the other way around. With economic variables, the effect of the unemployment rate is negative and statistically significant in Model 4. Nonetheless, with non-economic variables, the significance of unemployment rate disappears.
Also, the existence of the economic crisis (dummy variable) does not have any significant effect on results. On the other hand, the unemployment rate is negatively statistically significantly associated with populist vote shares in the EP elections by contrast with its positively significant effect in general elections in Model 1 and Model. However, non-economic variables are counted into the regression, it loses its significance, but only in Model 4, it has negative significance at 5 percent level. The real GDP growth rate is positively and statistically significant in vote shares in Model 4 and Model 6 at a different percent level. In the case that non-economic variables are taken into consideration, it remains its significance in Model 4 and Model 6. I can observe the same situation for government spending; in Model 4 and Model 6, it is positively significantly correlated with populists’ votes in the EP elections.
39 Table 2: Vote Share of the Eurosceptic Populist Parties in the EP Elections Between 1998-2018 Vote Share in the EP Elections Variables Model 1 Model 2 Model 3 Model 4 Model 5 (6) Interest Rate 0.0450 0.264 -0.285 0.615* -0.280 0.583 (0.195) (0.220) (0.256) (0.290) (0.261) (0.306)
Inflation Rate -1.553*** -1.608*** -1.019** -1.719*** -0.997* -1.156** (0.288) (0.294) (0.375) (0.345) (0.389) (0.399)
Money Supply 0.193*** 0.203*** 0.121** 0.184*** 0.148** 0.242*** (0.0214) (0.0175) (0.0378) (0.0289) (0.0542) (0.0435)
Exchange Rate 10.80** 11.42*** 5.833 8.185*** 9.079 13.82*** (3.386) (2.615) (3.734) (2.420) (5.441) (3.830)
Unemployment 0.321 -0.383** 0.330 -0.210 (0.199) (0.126) (0.200) (0.154)
Real GDP Growth 0.0411 0.507*** 0.0787 0.518** (0.165) (0.151) (0.171) (0.164)
Debt Ratio to GDP 0.0460 0.0381*** 0.0454 0.0104 (0.0356) (0.0109) (0.0362) (0.0137)
Gov. Spending -0.187 0.190** -0.179 0.256** (0.143) (0.0727) (0.146) (0.0883)
Economic Crisis 1.581 1.648 0.836 -2.058 (1.552) (1.014) (1.781) (1.506)
Confidence in ECB -0.0545 -0.294*** (0.0619) (0.0540)
Support for Euro 0.0488 0.117* (0.0539) (0.0458)
Refugee Crisis -1.355 -1.170 (1.976) (1.481)
Constant -8.904* -10.92** 3.028 -18.24** -2.513 -22.61** (4.469) (3.613) (9.968) (6.565) (11.86) (8.397) r2 0.473 0.279 0.508 0.347 0.511 0.416 N 252 252 252 252 252 252 df_m 15 4 20 9 23 12 Standard errors in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001
Regarding the non-economic variables, the confidence of the EU citizens in the ECB is highly statistically significant for a negative effect in vote shares of the parties, which is not observed in general elections. In Model 4 and Model 6, it is significant at 1 percent
40 while there is no significance for it in Model 5. Per contra, support of the EU citizens to Euro as a single currency has a significant positive effect at 5 percent level in compliance with Model 4 and Model 6.
5.3.Further Analysis In further analysis, I resort to a robustness test by holding the years when the elections were held, and all values between two elections will be represented with their means. While the EP elections are held in every five years, general elections sometimes do not follow an order because of political or economic inconsistency (e.g. snap elections). In the test, the effects of all variables in the years between elections are reflected to the next election. By this way, there will be no need to resort to the lagged variables by the lag operator. Thus, I can see the effects of the explanatory and control variables in the previous years on vote shares of the next elections. Here, I test their strength in the model to explain more robustly the relationship and the correlation between the monetary policy indicators and the vote shares of the Eurosceptic Parties and if they have a spurious effect on vote shares. Thus, these tests for two election-regression results will be very helpful to support or reject the hypotheses presented in the study.
41 Table 3: Vote Share of the Eurosceptic Populist Parties in General Elections (Means) Vote Share in General Elections Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Interest Rate 0.0450 1.915*** 1.595 1.810*** 2.283* 2.119*** (0.195) (0.252) (0.935) (0.323) (0.971) (0.395)
Inflation Rate -1.553*** -2.705*** -3.070* -3.189*** -2.974* -2.223*** (0.288) (0.454) (1.479) (0.709) (1.397) (0.564)
Money Supply 0.193*** 0.311*** 0.262* 0.353*** 0.0955 0.210** (0.0214) (0.0182) (0.118) (0.0643) (0.122) (0.0721)
Exchange Rate 10.80** 10.03 2.140 9.327 -18.70 -11.67 (3.386) (5.599) (12.15) (7.640) (12.92) (10.50)
Unemployment -0.222 -0.282* -0.703 -0.439* (0.515) (0.138) (0.508) (0.216)
Real GDP Growth -0.928 -0.358 -1.401 -0.731 (0.774) (0.273) (0.766) (0.413)
Debt Ratio to GDP 0.127 0.0375*** 0.122 0.0212 (0.0896) (0.0111) (0.0888) (0.0172)
Gov. Spending -1.046 -0.0648 -1.282* -0.143 (0.607) (0.179) (0.581) (0.222)
Economic Crisis -1.061 -3.924 0.0314 -5.112 (3.737) (3.167) (3.639) (3.338)
Confidence in ECB 0.202 -0.0701 (0.154) (0.0870)
Support for Euro -0.174 -0.0979 (0.137) (0.112)
Refugee Crisis 13.11** 11.60*** (4.053) (2.128)
Constant -8.904* -18.29** 37.79 -14.27 79.34 25.93 (4.469) (6.328) (37.21) (11.34) (40.58) (19.02) r2 0.473 0.468 0.623 0.501 0.688 0.571 N 252 78 78 78 78 78 df_m 15 4 20 9 23 12 Standard errors in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001
The results of the interest rate and the inflation rate in Table 3 support the effects of these variables in Table 1 in terms of affecting vote shares of the EuP parties in national general elections. Although the significance levels of these two variables are different,
42 their coefficients’ directions and statistical significance provide me for accepting Hypothesis 1 and Hypothesis 2 at 5 percent level with respect to the higher interest rate and the lower inflation rate are more likely to increase the number of people voting for the EuP parties in general elections. Besides them, the effect monetary policy is backed by the results in Table 3, except Model 5. When R-squared values of these models are compared, Model 5 seems more reliable. Thus, the effect of the money supply, as well as one of the exchange rate, is not statistically supported in accordance with Model 5 and Model 6. Another backed variable is the government spending with its negative coefficients at 5 percent. On the other hand, Model 5 and 6 in Table 3 give positive and statistically significant results for the dummy variable of the refugee crisis which occurs only in Model1 in Table 1. However, its significance levels and positive coefficients are much stronger in Table 3 with 1 and 0.1 percent significance levels.
Having looked at the results in Table 4, the effects of the variables for the EP election results are not as strong as in general elections. Model 5 offers a statistically significant and negative effect of the national inflation rate at 5 percent level. However, this situation and support are not valid for the interest rate. In other words, while the negative effect of the inflation rate is robust in the EP elections as well, the interest rate does not have a significant influence. Surprisingly, Model 6 demonstrates the exact opposite result for these two variables. According to this model, the interest rate is positively and statistically significantly associated with the vote shares of the EuP parties at 0.1 percent level. However, the inflation rate’s effect is seen spurious in this model. Nonetheless, with respect to its higher R-squared number, Hypothesis 3 is not found robust and rejected, while Hypothesis 4 is accepted by Model 5. However, this hypothesis was rejected in Table 2; so, I can see there is a spurious effect of the interest rate.
While Model 5 does not give any significant result for the other variables, Model 6 shows a significant and positive effect of money supply and negative effects of debt and ECB confidence on vote shares of the EuP parties in the EP elections. In accordance with Table 2, I can say only ECB confidence’s effect is spurious in Model 6.
43
Table 4: Vote Share of the Eurosceptic Populist Parties in the EP Elections (Means) Vote Share in the EP Elections Variables Model Model 2 Model 3 Model 4 Model 5 Model 6 Interest Rate 2.168** 1.957*** 1.841 2.558*** 1.812 2.755*** (0.761) (0.307) (1.252) (0.687) (1.314) (0.784)
Inflation Rate -1.502 -2.005** -3.956 -1.548 -3.484* -0.757 (1.059) (0.729) (2.007) (0.807) (2.065) (1.035)
Money Supply 0.305*** 0.274*** 0.230 0.245** 0.109 0.223* (0.0614) (0.0300) (0.129) (0.0871) (0.143) (0.0986)
Exchange Rate 2.972 1.001 3.654 4.580 -15.42 -4.331 (11.89) (7.598) (12.99) (10.89) (15.73) (12.25)
Unemployment -0.729 -0.468 -0.914 -0.313 (0.633) (0.273) (0.630) (0.361)
Real GDP Growth -1.265 0.350 -2.467 -0.226 (1.176) (0.525) (1.310) (0.587)
Debt Ratio to GDP -0.0437 0.00289 -0.0359 -0.0510* (0.118) (0.0208) (0.117) (0.0236)
Gov. Spending -0.138 0.292* -0.307 0.250 (0.805) (0.134) (0.850) (0.173)
Economic Crisis 1.138 4.936 -2.452 -0.296 (4.528) (3.593) (5.371) (3.215)
Confidence in ECB -0.0285 -0.367* (0.205) (0.153)
Support for Euro -0.140 0.135 (0.159) (0.141)
Refugee Crisis 10.64 6.258 (5.386) (3.206)
Constant -15.52 -9.975 13.22 -27.20 59.58 -4.426 (15.41) (8.643) (50.18) (16.70) (58.04) (20.92) r2 0.493 0.342 0.526 0.400 0.568 0.475 N 72 72 72 72 72 72 df_m 15 4 20 9 23 12 Standard errors in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001
44 5.4.Discussion Indeed, I use two models for panel data analysis, the fixed-effect and PCSE model. On the one hand, the results of the fixed-effect models seem more reliable concerning to R- squared value, PCSE gives the results preventing autocorrelation. Thus, I have evaluated the results by considering these situations. However, the results of the fixed- effect model offer more spurious results by linking the robustness check results to the main empirical study results.
After the robustness test, while Hypothesis 1 about the higher interest rate is more likely to increase the vote share of the EuP parties in general elections is accepted, Hypothesis 2 about the positive correlation between the interest rate and vote share in the EP elections is rejected. Even though it is not simple to say that higher or lower interest rate is better for the economy or the citizens’ economic outlook by generalizing it, each economic area or unit should be evaluated with its own dynamics. Thus, as discussed above, the higher interest rate is beneficial for creditors while it can be devastating for debtors (Goodhart and Lastra, 2018, p. 52). As long as the interest rate is going up, the EuP parties are more likely getting attractive for the voters only in general national elections. However, I cannot talk about this correlation’s existence for the EP elections. In other words, citizens take the interest rate into consideration when they vote in general elections for the Eurosceptic parties, whereas they do not do so in the EP elections. On the other hand, the inflation rate’s negative correlation in both elections, Hypothesis 3 and 4, are supported by the robustness test. Citizens regard the low inflation rate as an impetus to vote for the populists. When they are compared, the effect and strength of the inflation rate are further than ones of the interesting rate for the voters in compliance with the significant levels and coefficient values of these variables. Having looked at the general results of the models in two tables, however, four hypotheses of the study are supported by the empirical evidence. Yet, Hypothesis 3 is not found robust enough by the robustness test’s Model 5 in Table 4, while Hypothesis 4 is not found statistically significant by Model 6 in the same table. So, while the first two hypotheses concerning the relationship between the interest and the inflation rates and vote shares of the EuP parties in general elections; the robustness
45 test’s different two models’ results show the correlation between these rates and the vote shares are not so reliable statistically.
Especially the expectation of the European citizens for the higher inflation rate, accepted by the study, is in line with the macroeconomic view of populists which is called macroeconomic populism as well aiming at having the higher inflation rate to boost the output in the economy in the short-run (Rodrik, 2018a, p. 197). It seems that the alleged rigid inflationary policy of the ECB creates a resentment among some groups of the citizens, and since they see a (relatively) higher interest rate as a dynamo for growth and employment, they are more prone to vote for the EuP parties inclined to perform populist economic policies subsuming a higher inflation rate as well as employment in the short-run. Thus, I can say that the empirical results show a consistency with the theoretical frame of populist voting behaviour despite its lack in the literature yet. On the other hand, the importance of the theory of economic voting behaviour is seen in either election. For the voters of the populist parties, while the lower inflation rate is not an economic success, they think the other way around for the lower interest rate. Even though the only impetus for the voters is not the economic indicators, the results show that these are statistically significant effects for their voting preferences. Thus, although many of the EuP parties are not part of the governments, the citizens can reward them in accordance with the economic voting behaviour by seeing them as the opposition to the economic and political system that they are not satisfied with.2
While the study has attempted to examine the framework between the economic decisions and populist vote preferences, the study runs into also some difficulties and limitations. One of these limitations is the election number in the chosen countries. Since the elections are held in every four or five years in general, the election polls could be an alternative for the election results. However, they do not represent the results exactly; also, reaching various election polls in twelve countries is pretty exacting, exceeding the limits of the study, and requires competency in the local
2 The trend of vote shares of the EuP parties and the interest rates and the inflation rates in the Appendix in Figure 11 and Figure 12
46 languages to a certain extent because every source does not publish the reports in English or French. Even though this study’s results cannot cover the relationship between the ECB’s monetary policy decisions and the EuP parties in the other Eurozone countries (especially the East Europeans) and the other EU members such as the UK and Denmark; the research might be very helpful guide for forthcoming studies and brings a breakthrough to investigate the correlation between monetary policy and the increase of the EuP parties in this direction much more deeply.
47 6. CONCLUSION This study has attempted to explain and demonstrate the relationship and correlation between the monetary policy decisions of the ECB and vote shares of the EuP parties in both general and the EP elections between 1998 and 2018 by using the dataset that I created. While doing that, voting preferences of those who vote for the EuP parties has been investigated in terms of the economy, including monetary policy and macroeconomic indicators. In the literature, the relationship between the central banks and populism has been handled in the sense of the effect of populist parties on the independence and policies of the central banks. However, I tried to show the reverse effect by determining monetary policy decisions of the ECB and macroeconomic indicators as independent/explanatory and control variables. The empirical results offered to state that the lower inflation rate is more likely to direct some groups of voters to prefer the EuP parties in general elections. On the other hand, the effect of the interest rate and the inflation rate on vote shares in the EP elections is disputable because the empirical results do not show some contrast outputs. However, the effect of the inflation rate is statistically stronger than the one of the interest rate in the EP elections.
Even though Hypothesis 4 is rejected; the first three hypotheses are supported by the empirical results of the study. So, I can say the monetary policy decisions of the ECB are statistically significantly associated with the circumstances which direct the people to vote for the EuP parties in both general and the EP elections. The results show that the voters of the populist parties are not in favour of the alleged rigid inflationary policies of the ECB while they are not against the lower interest rate policy of it. The EuP parties tend to be opposition mechanisms for the voters against the national governments and the EU administrations apart from the mainstream parties. The empirical results highlight that while populist political economy has strong supporters, economic indicators are influential for the voting behaviour of the citizens. Even though all monetary policy indicators were not included as variable, the variables that are chosen are sufficient to draw a frame for the relationship and to grasp the correlation between the monetary policy and the vote share of the EuP parties. The results show consistency between the empirical results and the theories about the populist voter and
48 the economic voting behaviour resulting in support for the populist economy to a certain extent. The alleged “rigid” and “deflationary” economic policy directs a group of citizens to the EuP parties. In addition to the interest and inflation rate, two test results show that the cut in government spending creates a reaction in the citizens to vote for the EuP parties. Concerning these developments, if the voter is in favour of inflationary populist political economy, he/she is prone to punish the other parties, which are not the main interest of the study, and reward the EuP parties.
The study has presented the empirical results to show the relationship and the correlation between the monetary policy of the ECB and the EuP parties’ vote share in terms of economic voting preferences of the citizens. Both the sanctioning and selection models are reciprocated by the preferences of those who vote for the EuP parties concerning the economic voting. I think this study will be a sufficient guide to increase the numbers of research in this direction of the relationship between the monetary policy of the ECB and those parties’ vote share.
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54 APPENDIX
The list of the Eurosceptic Populist Parties:
Austria - Alliance for the Future of Austria (BZÖ) - Freedom Party of Austria (FPÖ) - Free Party Salzburg - Team Stronach
Belgium - Libertarian, Direct, Democratic - Nationale Democratie/National Front - Vlaams Belang - Vlaams Blok - People’s Party
France - Debout La France - La France Insoumise - Left Front - Left Party - Le Front National / Rassemblement National
Finland - Blue and White - Finns Part
Germany - Alternative für Deutschland (AfD) - Die Linke - Party of Democratic Socialism
55 - Republicana
Greece - ANEL - DIKKI - Golden Dawn (XA) - LAOS - Party of Hellenism / Hellenic Front - Synaspismos - Syriza
Ireland - Direct Democracy Ireland - Identity Ireland - Libertas Ireland - Sinn Fein - Socialist Party - Solidarity-PBP
Italy - Brothers of Italy - CasaPound - Five Star Movements - Lega Nord – Lega - No Euro Movement - Tricolour Flame
Luxembourg - Alternative Democratic Reform Party - Citizens’ List - The Left
56
The Netherlands - Forum for Democracy - List 5 Fortuyn - One NL - Party for Freedom (PVV) - Pim Fortuyn’s List - Socialist Party - 50PLUS
Portugal - Democratic Republican Party - National Renovative Party - New Democracy - Left Bloc
Spain - Podemos - United Left - Vox
57 Figure 11: Vote Shares of the Eurosceptic Populist Parties in General Elections with the Interest Rate and the Inflation Rate
Austria Belgium Finland France 60 40 20 0
Germany Greece Ireland Italy 60 40 20 0
Luxembourg Netherlands Portugal Spain 60 40 20 0
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 Year Vote Share Interest Rate Inflation Rate
Graphs by country
Graph 12: Vote Share of the Eurosceptic Populist Parties in the EP Elections with the Interest Rate and the Inflation Rate
Austria Belgium Finland France 40 30 20 10 0
Germany Greece Ireland Italy 40 30 20 10 0
Luxembourg Netherlands Portugal Spain 40 30 20 10 0
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 Year Vote Share Interest Rate Inflation Rate
Graphs by country
58