The 2008 financial crisis was devastating to the world economy. Just how devastating is something economists still argue over. It is not easy to add up the costs of bank bailouts, a lost decade of economic growth, spiking public debt, grinding austerity, and surging inequality. But the biggest cost of the crisis might be not economic but political: the populist wave that has swept over the world in the last decade, upending political systems, empowering extremists, and making governance more difficult. Financial crises regularly lead to political polarization and populism, but the recent populist surge has lasted longer than those that followed earlier crises—and done more damage.

RISE OF THE RIGHT

The crash in 2008 and the subsequent eurozone sovereign debt crisis dealt a severe blow to political systems in the West. Crisis fighting became the new normal. Long-standing two-party systems in France and Spain were swept away. Populist far-right forces emerged from the fringes, sometimes achieving major electoral victories.

In 2015, we published a study that compiled data on nearly 100 financial crises and more than 800 national elections in 20 democracies since 1870. We found that far-right parties are the biggest beneficiaries of financial crashes. After a crisis, the share of the vote going to right-wing parties increases by more than 30 percent. We also found that government majorities tend to shrink and governing becomes difficult as more parties and antiestablishment groups get into legislatures. These effects turn up in the wake of financial crises but, crucially, not in normal economic downturns.

People want to attribute blame, and the right is willing to present scapegoats.

Why are financial crises so disruptive? To start with, they are manmade disasters. People blame elites for failing to prevent them. It’s often not hard to find policy failures and cronyism among the rich and powerful, so trust in the political system erodes. This opens the door to political entrepreneurs who try to set “the people” against the "ruling class.”

The tendency to blame elites after financial crises might suggest that far-left parties would benefit as much as far-right ones. But that doesn’t happen. Our research shows that the far left’s vote share stays about the same in the aftermath of a crisis. It seems that when social groups fear decline and a loss of wealth, they turn to right-wing parties that promise stability and law and order. In the 1930s, for example, it was the German petite-bourgeoisie that enabled Hitler’s rise to power. Similarly, the election of U.S. President Donald Trump was decided by the middle and working classes.

Right-wing populists are much more willing to exploit cultural cleavages and blame economic problems on foreigners and those who supposedly put the interests of a global elite above those of their fellow citizens. As British Prime Minister Theresa May put it last year, “If you believe you are a citizen of the world, you are a citizen of nowhere.” The left, by contrast, has traditionally taken an internationalist outlook and usually avoids crude rhetoric against foreigners and minorities. People want to attribute blame, and the right is willing to present scapegoats: immigrants, China, or the European Union. The names change but the playbook remains the same.

THIS TIME IS DIFFERENT

Our historical data show that most political upheavals after financial crises have been temporary. After five years, voting patterns usually return to their pre-crisis status quo, fractionalization within parliaments decreases, and the far right loses its momentum.

This time is different. Ten years on, fractionalization, polarization, and far-right voting are all alive and well. The established political system continues to stumble from one shock to another. Even countries that until recently had been immune to far-right politics have started to succumb.

Meanwhile in countries where right-wing populism was already strong, its vote share has increased further, allowing populist parties to enter government. In 2014, the nationalist Bharatiya Janata Party won elections in India. In 2015, the right-wing Law and Justice Party won in Poland. In 2016, Rodrigo Duterte won the Philippine presidential election and Trump won the U.S. presidential election. And this year, Recep Tayyip Erdogan won a second term as president of Turkey, Viktor Orban triumphed in Hungary for the third time running, the hard-right Freedom Party joined a governing coalition in Austria, and the right-wing populist Lega Nord did the same in Italy. Never before have so many populists been in power at the same time.

Why have politics not returned to normal? Part of the explanation might be that populists are learning. More than ever before, populism has become a tried and tested political strategy. Populist leaders teach one another how to use TV and social media to create polarization and divisions. This is crucial, since a polarized society is the fundamental prerequisite of populist success. They emphasize nationalism, giving a sense of identity to dissatisfied voters. And they use simple language that creates intimacy.

Populists have also become better at surviving in power. Many have been reelected multiple times. They cultivate their image as outsiders, even when they come to dominate the political and business worlds. They gradually erode checks and balances and move to take over the media, all in the name of “the people.”

They have started adopting more orthodox economic policies, as well. Unlike their free-spending predecessors, most populist leaders now choose business-friendly policies that foster growth and avoid bouts of hyperinflation that could endanger their survival (although there are notable exceptions, such as Venezuelan President Nicolás Maduro). In short, populists all around the world are following a similar playbook—and it is working.

The most important reason for populists’ lasting success, however, is likely structural. The financial crisis of 2008 was a major shock, with more long-lasting effects than the average financial crisis. And the crash was just one of a series of disruptions over the past ten years. Politicians have seized on terrorist attacks and surging refugee flows to widen cultural splits. China and Russia now offer an authoritarian alternative to the Western model of open societies and free markets. Median incomes in the Western world are stagnant and inequality is rising. Lackluster economic performance in many countries has meant that the political trust the financial crisis destroyed has not recovered.

It’s hard to say how long the current political instability will last, in part because we don’t yet know enough about how populists perform in office, why they are often reelected, and what makes countries immune to populism.

But what is clear is that another financial crisis would do enormous damage. It would likely trigger yet another populist surge, bringing the far right to power in even more countries. Regulators, finance ministers and central bankers should take account of the political risks, not just the economic ones, when overseeing financial markets.