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Turn right at the crash: Financial crises boost right-wing candidates, German study finds

Financial crises tend to presage far-right votes: Economist

A string of surprising political victories for those espousing right-wing policies may in part be understood as a reaction to the recent financial crisis, according to a set of German economists.

"The data show us that this is the tendency — voters go more to the right than to the left — so one should have seen it coming, yes," Manuel Funke, a doctoral candidate in economics at the Free University of Berlin's John F. Kennedy Institute for North American Studies, said in a Tuesday interview on CNBC's "Trading Nation."

Funke, along with Moritz Schularick of the University of Bonn and Christoph Trebesch of the University of Munich, showed in a 2015 paper that from 1870 to 2014, a financial crisis has tended to be followed by a 30 percent increase in voting share for far-right parties.

"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 authors note.

Among the recent notable recent victories for right-wing causes were the United Kingdom's vote to leave the European Union and the U.S. election of Donald Trump, both of which came as substantial surprises to many. In France, Marine Le Pen of the far-right National Front party appears to be gaining momentum; similarly minded Dutch and Austrian leaders also appear likely to win their countries' elections.

To the authors' point, a seminal issue for Brexit proponents, as well as Trump, Le Pen, Geert Wilders of the Netherlands and Austrian Norbert Hofer, has been the dangers posed by immigrants.

"For the average voter, it's maybe an easier solution to put the blame for domestic problems on immigrants" rather than to tackle systemic issues endemic to a country's financial system or broader economy, Funke said Tuesday.

Interestingly, a similar political shift does not appear to happen after non-financial crises, the authors found. Perhaps that is, they hypothesize, because "non-financial crises are perceived as 'excusable' events, triggered by large exogenous shocks such as oil prices, natural catastrophes, or war. In contrast, financial crises may be perceived as an endogenous and 'inexcusable' type of crisis that are the result of policy failures, moral hazard and favoritism."

In addition to the ballot box, the ramifications of financial crises may be seen out in the streets, the authors add. Demonstrations and violent riots tend to rise markedly in the five years after a crisis.

As for why this matters: The rise in votes for far-right parties, at the expense of support for government majorities, can lead to less effective government, according to the authors.

"These developments likely hinder crisis resolution and contribute to political gridlock," they wrote. "The resulting policy uncertainty may contribute to the much debated slow economic recoveries from financial crises."

Of course, some may favor far-right policies, and some have even voiced support for government gridlock.

Yet the history-minded German authors end their paper with an exhortation for financial regulators and monetary policymakers, "Preventing financial crises also means reducing the probability of a political disaster."