In a fascinating study, Manuel Funke, Moritz Schularick and Christoph Trebesch analysed the social and political aftermath of 103 financial crises. During the five years following a financial crisis, the following pattern can be expected:
- The vote share of far right parties increases by 30%. For far left parties, such an effect was not found. «After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners».
- The fragmentation of politics increases and the vote share of coalition parties diminishes.
- There is more frequent government instability and a higher probability of executive turnover.
- The average number of anti-government protests almost triples; the number of violent riots doubles (but this effect is lacking in the post-WW2 period) and general strikes increase by at least one-third.
Sounds familiar. Interestingly, the researchers have also looked into long-term effects:
The graphs demonstrate that the political effects are temporary and diminish over time. 10 years after the crisis, almost all variables are back to their pre-crisis levels. The top panel shows that the increase in far-right votes is no longer significantly different from zero after year 8.
The authors ascribe the rise of the Dutch Party for Freedom (5.9% in 2006, 15.5% in 2010) to the crisis of 2008, so the historical pattern suggests their popularity will diminish by 2016.
Or does it? The graph the authors refer to helps to clarify this matter. There’s no evidence that the popularity of far right parties diminishes in the longer term. What they’re describing is that the confidence interval (the grey area) widens. So much so that you can’t really predict on the basis of the available data what will happen after eight years.
Another matter is the interpretation of the effects. Funke e.a. consider the political instability following financial crises a «political disaster»:
These developments likely hinder crisis resolution and contribute to political gridlock. The resulting policy uncertainty may contribute to the much debated slow economic recoveries from financial crises.
They seem to imply that governments tend to take appropriate measures and that therefore, having a strong government is good for economic recovery. That’s debatable. People like Paul Krugman and Ewald Engelen argue that the austerity policies of especially European governments have a negative impact on economic recovery.
This is relevant, for previous research found that the same social upheaval Funke a.o. associate with financial crises can also be explained as an effect of austerity policies. This raises the question how causality works here: are social (and political) unrest caused by financial crises, or by the way in which governments respond to these crises? Perhaps the stubborn austerity policies of the European and Dutch governments have contributed to the continuing popularity of the Party for Freedom?
Funke a.o. describe their research here; Statewatch has put the original article (pdf) online (I discovered the study via an article by Krugman). The earlier study on austerity and protests was done by Jacopo Ponticelli and Hans-Joachim Voth (I wrote a post on it a couple years ago).