The Political Costs of Austerity

Abstract

Anti-establishment and Eurosceptic parties have gained significant support since the Great Recession and the subsequent European debt crisis. Higher vote shares for these parties have increased partisan conflict, led to more fragmented parliaments and the resulting political environment is generally associated with higher policy uncertainty and lower economic growth (Azzimonti and Talbert 2014; Azzimonti 2018). Notably, the rise in extreme parties support occurred in a period of significant fiscal policy interventions. In particular, several European countries have implemented large-scale fiscal consolidation measures to bring down elevated public debt levels and reduce the risk of sovereign default. The massive reductions in public spending faced significant opposition and resulted in an anti-austerity movement as documented in Fetzer (2019). In this paper, we empirically investigate whether fiscal austerity contributed to the increase in vote shares for extreme parties over the last decades.

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