A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Funke, Manuel; Trebesch, Christoph Article Financial Crises and the Populist Right ifo DICE Report Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Funke, Manuel; Trebesch, Christoph (2017) : Financial Crises and the Populist Right, ifo DICE Report, ISSN 2511-7823, ifo Institut - Leibniz-Institut für Wirtschaftsforschung an der Universität München, München, Vol. 15, Iss. 4, pp. 6-9 This Version is available at: http://hdl.handle.net/10419/181253 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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(2015) and Col- antone and Stanig (2017) suggest that populist voting is INTRODUCTION largely driven by a backlash against economic globali- zation, particularly in regions with a declining manu- Almost ten years have passed since the start of the facturing sector that have suffered from increasing most severe financial crisis of recent decades. The competition from China and Eastern Europe. Dustmann 2008 crash, which was followed by the Eurozone debt et al. (2017) show that trust in the political system is crisis in 2011/2012, resulted in a severe decline in GDP eroding, and especially trust in the European Union. and a spike in unemployment. Besides these economic Inglehart and Norris (2016) find evidence in favour of a costs, the crisis also triggered major political disrup- “cultural backlash” hypothesis, as many voters are Manuel Funke tions. Two-party systems that had been stable for opposed to the rapid change in Western value systems Kiel Institute for decades were swept away, long-ruling parties saw their and increasingly progressive politics. Moreover, Stein- the World Economy. vote share drop to single digits and populist parties mayr (2016) and Halla et al. (2017) study the link gained new political space. Right-wing populist parties between populism and immigration, particularly after in particular thrived, as they entered parliaments and, the rapid increase in the number of refugees entering in some cases, government. The election of Donald Europe after 2015 (with conflicting findings). Trump in the US and the Brexit vote in the UK are the Here, we complement these and other studies by most recent culminations of the rise of populism in the focusing on financial crises as an additional, and possi- Western world. bly reinforcing driver of populist voting. More specifi- In a recent paper (Funke et al. 2016) we asked how cally, we study the link between crises and right-wing the political aftermath of the 2008 crisis compares to populism in two main crisis clusters of recent decades: previous experiences. Can we identify systematic shifts First, we explore the political aftermath of the financial Christoph Trebesch in the political landscape after financial crises and if so, crises in Scandinavia, Switzerland and Italy during the Kiel Institute for what do these shifts look like? To answer these ques- 1990s, and secon, the period after 2008, again with an the World Economy. tions, we conducted a comprehensive historical analy- emphasis on Europe. sis of the political fall-out of financial crises. We traced the political history of 20 advanced democracies back BORN IN THE 1990s: POST-CRISIS POPULISM IN to the 1870s and constructed a dataset of over 800 elec- SCANDINAVIA, ITALY AND SWITZERLAND tions from 1870 to 2014. We then complemented this dataset with existing data on over 100 financial crises In the late 1980s and early 1990s, Denmark, Norway, from Jordà et al. (2017). Italy and Switzerland were hit by financial crises.2 How The results in Funke et al. (2016) show that finan- did right-wing populist parties fare back then? Figure 1 cial crises put a strain on democracies: government shows the voting shares in national parliamentary elec- majorities shrink, parliamentary fractionalization tions of the main right-wing populist parties in these rises, the number of parties in parliament increases, four countries. We consider the last election before the and the far-right parties see strong political gains. In a outbreak of the crisis and the three elections thereafter. counterfactual analysis, we find that financial crises The main takeaway from this figure is that right-wing have much stronger political effects than other type of populist parties gained traction from the financial cri- economic downturns, such as recessions or output col- ses in their countries. lapses that do not involve financial turmoil. We there- In Norway, the vote share of the right-wing populist fore conclude that political fragmentation, polariza- Progress Party stalled at 5% or lower for ten years. tion and radicalization are a hallmark of major financial However, in the wake of the 1988 crisis, its vote share crises. tripled from 3.7% in 1985 to 13.0% in the first post-crisis Here, in this short piece, we build on our long-run election of 1989. Subsequently, the party temporarily work to drill deeper into the political developments of suffered losses in the 1993 election, but bounced back the past decades, with a focus on right-wing populism. to 15.3% in 1997, remaining well above the pre-crisis To define right-wing populist parties, we follow recent level at all times. Today, the party has become a domi- work by Mudde (2015), Pausch (2015), Bauer (2016) and particularly Rodrik (2017), according to whom right- 2 Dates of financial crises are based on Jordà et al. (2017). Financial crises wing populist parties “emphasize a cultural cleavage, are defined as events during which a country‘s banking sector experiences bank runs, sharp increases in default rates accompanied by large losses of 1 This work is part of a larger project kindly supported by a research grant capital that result in public intervention, bankruptcy, or the forced mergers from the Bundesministerium für Bildung und Forschung (BMBF). of financial institutions. 6 ifo DICE Report 4 / 2017 December Volume 15 FORUM nant force in Norwegian politics and made it into the Lombard League) gained a mere 0.5% of the vote and government in 2013. two mandates in parliament. In the first post-crisis The Danish Progress Party also benefitted from elections (1992), however, it gained 8.7% and 55 deputy the Nordic financial crisis. After a stretch of stagnant seats. The party achieved a similar result in the 1994 and decreasing voter support in the late 1970s and elections and formed a short-lived coalition govern- 1980s, the party more than doubled its vote share from ment with the right-wing nationalist Alleanza Nazion- 3.6% in 1984 to 9% in the 1988 post-crisis election. In ale and Silvio Berlusconi’s conservative Forza Italia. the following two elections, the vote share remained Lega Nord gained further ground in the 1996 elections above the pre-crisis level, but the party essentially col- and eventually returned to government in 2001-2005 lapsed in the late 1990s. However, a new party, the Dan- and again in 2008-2011, both times as part of Berlusco- ish People’s Party was founded by former leaders of the ni’s coalition. The party faced losses in 2013 with votes Progress Party in 1995. The People’s Party can be inter- absorbed by the new protest party Five Star Movement, preted as the de facto successor of the Progress Party but is doing far better in recent polls. Its role is likely to and now plays a crucial role in Danish politics. Indeed, be crucial in the next Italian election. In short, the Lega the center-right minority governments of the past ten Nord is an important example of how a political force years all relied on the People Party’s parliamentary moved from political obscurity to political significance support. in the wake of a financial crisis. In Switzerland, the right-wing populist People’s Party secured roughly 10% of the vote throughout the EUROPE SINCE 2008: RIGHT-WING POPULISM 1970s and 1980s, including in the 1987 election. How- ENTERS THE CORE ever, after the Swiss financial crisis of 1991, the People’s Party gained a further 4 percentage points of the vote In terms of right-wing populism, the European experi- in the first election after the crisis (1995), and moved ence after the crash of 2008 has been strikingly simi- towards 30% in the following two elections (1999 and lar to that of the more idiosyncratic, country-specific 2003).