DP12944 Global Crises and Populism: the Role of Eurozone Institutions

Author(s): Luigi Guiso, Helios Herrera, Massimo Morelli, Tommaso Sonno
Publication Date: May 2018
Keyword(s): Financial Dependence, Frustration, Globalization, populism, Relocation
JEL(s): D72, D78, F14, F16
Programme Areas: Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12944

Populist parties are likely to gain consensus when mainstream parties and status quo institutions fail to manage the shocks faced by their economies. Institutional constraints, which limit the possible actions in the face of shocks, result in poorer performance and frustration among voters who turn to populist movements. We rely on this logic to explain the different support of populist parties among European countries in response to the globalization shock and to the 2008-2011 - financial and sovereign debt crisis. We predict a greater success of populist parties in response to these shocks in Euro zone countries, and our empirical analysis confirms this prediction. This is consistent with voters' frustration for the greater inability of the Euro zone governments to react to dicult-to-manage globalization shocks and financial crises. Our evidence has implications for the speed of construction of political unions. A slow, staged process of political unification can expose the EU to a risk of political backlash if hard to manage shocks hit the economies during the integration process.