For decades, German fiscal policy was shaped by the idea that the sustainability of public finances should be measured by the debt ratio and annual budget deficit. With the introduction of the debt brake, this approach found its way into the German constitution in 2009. After two years of pandemic where the debt rules were suspended, and amidst new upheavals and crises, German finance minister Christian Lindner announced a ten percent budget cut for the 2023 federal budget, returning to the procyclical austerity driven fiscal policy regime of the post financial crisis era.

Meanwhile, recent research (e.g. Philippa Sigl-Glöckner et al. (2021)) has highlighted that the “austerity paradigm” leads to suboptimal outcomes with regards to, for example, long-term fiscal sustainability and efforts to promote decarbonization. Said strand of literature is complemented by a recent publication that sheds light on the relationship between fiscal austerity and political fragmentation. Using a novel regional database covering over 200 elections in several European countries, the researchers around Ricardo Duque Gabriel, Mathias Klein and Ana Sofia Pessoa provide new empirical evidence on the political consequences of fiscal consolidations.

Populist and far-right wing parties have been on the rise in many parts of Europe since the Great Recession and the subsequent European Sovereign Debt Crisis. This rise occurred during a period of significant fiscal policy interventions and strong austerity measures aimed at lowering existing levels of public debt. In some countries, such as Greece, the strong reductions in public spending were responded to with significant opposition and anti-austerity movements.

Assembling data from more than 200 regional, national, and European elections across 124 European regions and 8 countries between the years 1980 to 2015, the authors show a strong increase in extreme parties’ vote share in the years after the Great Recession and the Sovereign Debt Crisis. The data also indicates a negative correlation between patterns of extreme voting in more recent years and changes in regional government spending. For every 1% reduction in public spending, the vote share of extreme parties rose by 3%. This can be explained in part due to a fall in overall voter turnout paired with an increase in the total votes for extreme parties. As such, austerity not only favors detrimental economic developments but also increases political fragmentation, amplifying the political costs of economic downturns by provoking distrust in the political environment. The findings persist even when accounting for periods of extreme downswings, such as the Great Recession, indicating a more general pattern. While both far-right and far-left parties experience rising levels of support, the increase for far-right parties is stronger.

The increase in extreme parties’ support is significantly larger when the austerity measures are implemented during a recession as opposed to a period of expansion. More so, austerity-driven recessions cause a significantly larger increase in the vote share for extreme parties than other recessions, creating more distrust in the political environment.

Read the whole study here.