The 2008 financial crisis was devastating to the world economy. Just how devastating is something economists still argue over. It is not easy to add up the costs of bank bailouts, a lost decade of economic growth, spiking public debt, grinding austerity, and surging inequality. But the biggest cost of the crisis might be not economic but political: the populist wave that has swept over the world in the last decade, upending political systems, empowering extremists, and making governance more difficult. Financial crises regularly lead to political polarization and populism, but the recent populist surge has lasted longer than those that followed earlier crises—and done more damage.
RISE OF THE RIGHT
The crash in 2008 and the subsequent eurozone sovereign debt crisis dealt a severe blow to political systems in the West. Crisis fighting became the new normal. Long-standing two-party systems in France and Spain were swept away. Populist far-right forces emerged from the fringes, sometimes achieving major electoral victories.
In 2015, we published a study that compiled data on nearly 100 financial crises and more than 800 national elections in 20 democracies since 1870. We found that far-right parties are the biggest beneficiaries of financial crashes. After a crisis, the share of the vote going to right-wing parties increases by more than 30 percent. We also found that government majorities tend to shrink and governing becomes difficult as more parties and antiestablishment groups get into legislatures. These effects turn up in the wake of financial crises but, crucially, not in normal economic downturns.
People want to attribute blame, and the right is willing to present scapegoats.
Why are financial crises so disruptive? To start with, they are manmade disasters. People blame elites for failing to prevent them. It’s often not hard to find policy failures and cronyism among the rich and powerful, so trust in the political system erodes. This opens the door to political entrepreneurs who try to set “the people” against the "ruling class.”
The tendency to blame elites after financial crises might suggest that far-left parties would
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