New research by Alison Johnston, professor of political science in the School of Public Policy, finds that populist governments adjust their macroeconomic policies to appease bond markets
Alison Johnston
By Colin Bowyer, Communications Manager - March 6, 2025
Over the past three decades, populist parties have become increasingly successful electorally, in some cases even joining as coalition partners in the governments of mainstream parties. On rarer occasions, populist parties have commanded full control over government, granting them authority to dictate national policy. Why populist governments’ electoral success is due to a variety of reasons, including perceived economic inequality and cultural backlash, yet, when populist parties control governments, they are subject to a constraint they don’t have to worry about while outside of government: the whims of financial markets.
As governments increasingly rely on borrowed funds, particularly from foreign investors, they succumb to greater pressure to shape their fiscal and monetary policies around the preferences of bond holders. In a new 2025 paper, currently under review, Professor of Political Science Alison Johnston looks at populist governments in Italy (5 Star/Lega) and in Hungary (Fidesz), and why they appease bond holders through flexible macro-economic policies.
“In Europe, populists come in as part of coalitions,” Johnston explained. “It’s correct to assume that populist far-right governments should be more resistant to market pressures; given their tendency to scapegoat elites, including financial elites, as well as their championing of ‘the people’ and prioritizing their voters’ interests over investors. Nevertheless, we find that markets still bring populist governments to heel.”
Once populists enter power, they often attempt to re-engineer financial markets to reduce the influence of foreign investors and entrap domestic investors (and central banks) into supporting their sovereign financing needs. Bond markets negatively react to far-right populists entering government, some of which cave, yet others remain defiant.
Using the populist 5 Star/Lega coalition in Italy and Viktor Orbán’s Fidesz’s government in Hungary, Johnston finds that populists do bend to market pressure, but that this market-disciplining effect does not stem primarily from foreign investors. Despite the constant chastising of foreign investors by populist governments in both countries, it was the power of domestic investors that caused these governments to reverse course on their macroeconomic policies.
“Interestingly,” explained Johnston, “it was domestic interests [bond holders] that mattered, like smaller private banks and households who purchased government bonds. These parties were more vested and vocal about how governments were enacting economic policy, particularly because they couldn’t leave, like other foreign capital.”
In Italy, the 5 Star/Lega coalition government watered down its “People’s Budget” not in response to threats from the European Commission or foreign capital flight, but rather after demand for Italian bonds from domestic investors collapsed in November 2018. In Hungary, domestic bondholders’ reluctance to finance the government in the face of high inflation in 2022 forced the Orbán government to renege on major spending commitments and compromise with the European Union. Because domestic investors served as both governments’ bond “buyers of last resort”, these governments needed to maintain their favor in order to borrow.
“What this shows is that financial markets still remain an important constraint on populist governments,” said Johnston. “Markets do constrain populists’ macroeconomic policies, but we find this constrain comes from domestic investors, an audience their policies are designed to privilege.”
The forthcoming paper builds on Johnston’s 2024 research published in Comparative Political Studies, where Johnston identified more market volatility overall when ruling coalitions included members of far-right parties.
“When analyzing bond spreads from 2000 to 2019 in high income countries, the results showed that right executives enjoy prolongedly lower bond spreads than their left-wing counter-parts, but only when they rule without the far right.”
What does this mean for the United States? “It depends,” said Johnston. “The U.S. enjoys a privileged position as a safe haven for assets, but if bond markets, both domestic and foreign, become spooked by the Trump Administration’s populist macroeconomic policies, will the administration back off?”
As populist movements rise, Johnston’s work is relevant more than ever before. “Markets are really being tested for the first time,” said Johnston.