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The Political Costs of Austerity

Ricardo Duque Gabriel¹; Mathias Klein²; Ana Sofia Pessoa³

¹ University of Bonn and National Bureau of Economic Research · ² Sveriges Riksbank , · ³ University of Bonn

Using a novel regional database covering over 200 elections in several European countries, this article provides new empirical evidence on the political consequences of fiscal consolidations. To identify exogenous reductions in regional public spending, we use a Bartik-type instrument that combines regional sensitivities to changes in national government expenditures with narrative national consolidation episodes. Fiscal consolidations lead to a significant increase in extreme parties’ vote share, lower voter turnout, and a rise in political fragmentation. We highlight the close relationship between detrimental economic developments and voters’ support for extreme parties by showing that austerity induces severe economic costs through lowering GDP, employment, private investment, and wages. Austerity-driven recessions amplify the political costs of economic downturns considerably by increasing distrust in the political environment.

DOI

10.1162/rest_a_01373

Volume

108 (1)

Pages

145-161

Language

en

Export

BibTeX

Sources

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