The old adage goes that desperate times call for desperate measures. Although how useful or constructive an approach this is, is highly debatable, real-world data seems to indicate that difficult conditions do, indeed, push the public’s political preferences. And, in no small measure, this shift can support extremist ideas.

A new study co-authored by an MIT professor examined the link between the 2008-09 financial crisis and the rise of populist politics. It reports that the piling-on of debt that households and private individuals experienced as a result of that crash did indeed help foster populists to power. The research focused on Hungary and the right-wing political party Jobbik, finding that around one-fifth of the shift toward such political movements in the country can be traced back to increases in personal debt.

Ends that shouldn’t meet

“This was very salient for many people, and it was a key aspect of the crisis that touched people every single month in their pocketbook,” says Emil Verner, an assistant professor of finance at the MIT Sloan School of Management and a co-author of a paper detailing the study’s results.

“The far right … [was] able to attract a number of voters, middle-class or even slightly higher than middle-class people, who had mortgages and otherwise probably wouldn’t have voted for the far right.”

For the study, the team tracked changes in political preference and analyzed these alongside the prevalence of private debt.

The story of this debt started in the year 2000, as Hungarian banks recorded a great increase in the number of applications for loans in foreign currency — and with it, an increase in outstanding loans. By 2006, around 60% of the country’s total household debt was represented by Swiss francs. Soon after that, around September of 2008, Hungary’s own currency, the forint, dropped by a staggering 23% in a very short time. Household debt in the country increased by 4& of Hungary’s national GDP in short order due to these fluctuations.

Like everywhere else in the world, jobs ran dry fast, dropping incomes, and failing banks. But this outstanding foreign-currency debt was an issue that was quite specific to Hungary, and one that Hungarian households had to contend with on top of everything else that was happening.

Up to now, Jobbik was not a major political player in Hungary. Public perception largely held it to be a very unappetizing organization, its paramilitary wing and frequent accusations of anti-Semitism ringing painfully against the country’s past experience with the dictatorship of one color or another.

However, the dire economic downturn did leave a meaningful mark on Hungarian politics. In the 2006 elections, far-right organizations only received 2.6% of all votes cast. This rose sharply in future elections: 17% in 2010 and 20% in 2017.

For the study, the team looked at the level of debt and foreign debt held across Hungary’s zip codes, pooling them with voting data. This allowed them to chart how shifts in political preferences aligned with the increase in private debt. This approach showed that between 2006 and 2010 votes tended to shift toward the far right in areas where the debt-to-income ratio increased. For every 10% increase in debt to income, the share of votes cast for far-right candidates rose between 1.6% to 3%.

Overall, the spike in foreign-currency debt during this time accounted for 20% of the change in votes toward far-right candidates, the team explains, and this effect is still visible today.

The team explains this by the fact that much of Hungary’s debt was in foreign currency. Jobbik had a highly-nationalistic platform and was the most aggressive party during electoral campaigns on matters of offering relief from foreign-held debt. Its competitors, meanwhile, were much vaguer on the topic.

“Populist parties like to exploit divisions or cleavages in society between the ‘good’ ordinary people, and the elites or foreigners or any kind of outside threat that they [populists] can create. Conflict between debtors and banks seems to have been a particularly fruitful way for them to do that,” Verner says. “I think that helps us understand why they’ve been successful, particularly after financial crises.”

This, of course, doesn’t mean that the increase in outstanding public debt was the only factor in the political shifts seen in Hungary during this period. The team examined other potential factors such as historical leanings towards extremist policies or attitudes, immigration patters, the prices of properties and stocks, changes in employment local employment levels and so on. Ultimately, however, they found that the relationship between debt and a shift towards the far-right political spectrum was solid regardless of other factors.

“[Voters] were potentially open to something new,” Verner explains. “And that something new was a much more radical party.”

Although Jobbik itself was never elected to office, its rhetoric and relative success paved the way for Hungary’s current ruling party, Fidesz, another group on the right, to do so instead.

“If you look at times of major financial distress, financial crises, they’re often associated with political upheaval,” Verner reflects, including “more political polarization, loss of [support for] the center establishment parties toward more fringe or nonestablishment parties, and a shift in support for far-right populist parties.”

“One of the key legacies of the 2008 crisis was the rise of populism, and one of the places that was most pronounced was Hungary.”

The findings go a long way toward showing how financial security — or in Hungary’s case, financial insecurity — can help drive quick and significant political changes. The findings should help to inform political observers around the world of the potential that debt crises have to spiral out into much wider social events, such as the ascension of extremist movements to power.

“One of the implications is that how we design and regulate our financial system and the types of financial products we make available to consumers can have really far-reaching effects,” Verner says. “Not just for the economy but even for broader society and how we organize ourselves, our political systems, and what types of policies we put in place.”

The paper “Financial Crisis, Creditor‐Debtor Conflict, and Populism” has been published in The Journal of Finance.