We all know the 2008 financial crisis was devastating to the global economy. But the effects aren't just economic: Financial crises also can screw up political systems, empowering extremists and making effective governance a lot harder.
According to a new study by a group of German economists, we've actually been underestimating how badly financial crises screw up politics in advanced democracies — which means the aftereffects of the 2008 crisis may have been even worse than we thought, in ways that are still with us today.
The authors of the study — Manuel Funke, Moritz Schularick, and Christoph Trebesch — found that financial crises are associated with a stunning rise in support for extreme right-wing parties. They also found a sharp uptick in anti-government demonstrations, falling support for the governing party, and a rise in the number of smaller parties in government. The result is a political system that's less capable of passing new laws to deal with the economic catastrophe and more open to far-right policy agendas.
"Political radicalization, declining government majorities and increasing street protests appear to be the hallmark of financial crises," they write. "Preventing financial crises also means reducing the probability of a political disaster."
Financial crises empower the hard right — but not their left-wing equivalents
Funke and company compiled information on legislative elections in 20 advanced democracies between 1970 and 2014, a data set that covers about 800 individual elections. They used it to compare the politics in each of those countries in the first five years before a major financial crisis and the next five years afterward, to see how things changed as a result of the crisis.
Their first finding, as they explain in a write-up at VoxEU (no relation), is that "politics takes a hard right turn following financial crises." Specifically, they found that the number of votes going to far-right parties is about one-third higher five years after the crisis than it was before the crisis.
This historical trend holds true today. "In the aftermath of the 2007-08 global crisis," Funke and his colleagues write, "far-right and right-wing populist parties more than doubled their vote share in many advanced economies." For example, France's xenophobic, far-right Front National party increased its vote share from just 4.3 percent in 2007 (right before the global financial crisis) to a stunning 13.6 percent in 2011.
You might expect this to happen because of generic frustration with the political system: People just experienced a massive economic collapse and are looking for some kind of radical alternative. But if that were true, the far left should also benefit from the crisis.
It turns out that doesn't happen. The study's authors found that "on average, the far left did not profit equally from episodes of financial instability." Here's what that looks like charted:
So while support for far-right parties dramatically increases in the wake of major financial crises, support for far-left parties stays about the same.
This explains why a major revival of Marxist politics, much predicted after the 2008 crisis, didn't really happen (and no, Bernie Sanders doesn't count). Parties whose political agendas center on xenophobia and exclusion seem to profit more from financial disaster than do parties critical of capitalism itself.
It's not just the far right
The political consequences of financial crises go far beyond just empowering the far right: They also make it harder to govern. According to Funke et al., a variety of things happen in the wake of financial crises, all of which complicate governance:
- Support for governing parties drops by an average of 10 percent within the first two years, and opposition parties increase their vote share by roughly the same amount. But the governing party's vote share rebounds in the next three years. This kind of inconsistency can make pursuing a coherent response to the crisis hard.
- The number of parties in the legislature tends to increase sharply, making it harder to corral majorities for new policies.
- Strikes, street protests, and riots surge:
These effects, together with the surge of far-right governments, very likely combine to make recovering from financial crises harder — which partly explains why both the economic and political situation around the developed world — think Greece, Ireland, Portugal, Spain — seemed so bad so long after the 2008 crisis.
"These developments likely hinder crisis resolution and contribute to political gridlock," Funke et al. conclude. "The resulting policy uncertainty may contribute to the much-debated slow economic recoveries from financial crises."
The effects are temporary — but how temporary, exactly?
The good news is that the political effects of a major financial crisis appear to be temporary. "A decade after the crisis hits, most political outcome variables are no longer significantly different from the historical mean," the study's authors write. "This is true for far-right voting and also for government vote shares. ... Only the increase in the number of parties in parliament appears to be persistent."
But even while the immediate political effects may fade after about a decade, they can have much longer-lasting consequences. If the authors are right and these temporary surges in political instability cause slow economic recoveries, then these political effects are responsible for millions of people remaining unemployed and impoverished long after crises have ended. Moreover, a lot of European states still haven't really recovered from the crisis itself, which is part of why the eurozone feels like it's constantly on the brink of falling apart.
The effects might even be even longer-lasting: Long-term unemployment can render large numbers of people virtually unemployable, indefinitely raising unemployment rates. It's part of a problem that economists call hysteresis: Temporary periods of intense economic crisis can do long-term damage to the economy.
The rise of the far right can also have longer-lasting political consequences. Take Hungary, for example: The 2008 financial crisis helped rocket the far-right, anti-Semitic Jobbik party to third place in Hungary's 2010 national parliamentary elections. The governing right-wing party, Fidesz, suddenly feared competition from its right flank — prompting Prime Minister Viktor Orban to start engaging in xenophobic and anti-Semitic politics.
Today, Orban is perhaps the most prominent European leader advocating that the EU close its borders to Syrian refugees.
"His assistants have been making anti-Semitic speeches; his government has been erecting statues to fascists; they've revamped the national school curriculum, and are assigning many authors who are overt fascists," Kim Lane Scheppele, a Hungary expert at Princeton University, told me in September. "The more Jobbik has nipped at his heels, the more overt about this he becomes."
Hungary isn't a perfect test case for Funke and his colleagues' theory —for one thing, Jobbik's surge in the polls has yet to really subside even though we're past the five-year window. And one study shouldn't be seen as a bible that fully explains something as complicated as post-crisis politics.
But it does offer a sophisticated look at the political effects of financial crises — and it suggests that we may still be living with the Great Recession's effects for a lot longer than we thought.