Toxic Loans and the Rise of Populist Candidacies

Abstract

The role of financial crises in boosting populism has been well documented. Yet the specific mechanisms through which this occurs remain elusive. This paper studies how populist candidacies were fueled by a case of public financial mismanagement, which became salient during the Great Recession. Using an instrumental variable strategy, we exploit the leak of a list of French municipalities that contracted “toxic” loans before the crisis. During the subsequent municipal elections, we show that i) the right-wing populist party is the only political orientation experiencing an increase in vote share, while mainstream incumbents' political orientations are electorally punished, ii) both right-wing and left-wing populist candidacies are more likely in municipalities affected by the scandal, leading to a rise in electoral competition, iii) the entry of populist candidates remains persistent over time. Importantly, the findings are not driven by economic deprivation, austerity measures, or pure demand for a political turnover. They suggest that the disclosure of public financial mismanagement contributes by itself to the rise of populism during financial crises via the strategic entry of populist parties.

Keywords: Populism, Financial crisis, Candidates, Extreme, Far right, Far left, Instrumental Variable Strategy, Municipalities, French elections

JEL Classification: P16, G01, D72, P48, P43