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Political Economy (Gabriel et al.)

The Political Costs of Austerity by Ricardo Duque Gabriel, Mathias Klein, Ana Sofia Pessoa published by SSRN (5/2023).

Using a novel regional database covering over 200 elections in several European countries, this paper provides new empirical evidence on the political consequences of fiscal consoli[1]dations. To identify exogenous reductions in regional public spending, we use a Bartik-type instrument that combines regional sensitivities to changes in national government expendi[1]tures with narrative national consolidation episodes. Fiscal consolidations lead to a signifi[1]cant increase in extreme parties’ vote share, lower voter turnout, and a rise in political frag[1]mentation. 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 dis[1]trust in the political environment.

Austerity, Economic Vulnerability, and Populism by Leonardo Baccini, Thomas Sattler published by SSRN (6/2023).

Governments have repeatedly adjusted fiscal policy in recent decades. We examine the political effects of these adjustments in Europe since the 1990s using both district-level election outcomes and individual-level voting data. We expect austerity to increase populist votes, but only among economically vulnerable voters, who are hit the hard- est by austerity. We identify economically vulnerable regions as those with a high share of low-skilled workers, workers in manufacturing and in jobs with a high routine-task intensity. The analysis of district-level elections demonstrates that austerity increases support for populist parties in economically vulnerable regions, but has little effect in less vulnerable regions. The individual-level analysis confirms these findings. Our re- sults suggest that the success of populist parties hinges on the government’s failure to protect the losers of structural economic change. The economic origins of populism are thus not purely external; the populist backlash is triggered by internal factors, notably public policies.

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