The current political crisis in France and the ongoing US government shutdown demonstrate that unsustainable fiscal policies affect more than just the economy. High levels of public debt exemplify the erosion of public confidence in democracy itself. Across advanced economies, voters are becoming increasingly susceptible to the simplistic narrative that governments are subservient to élites and external pressures, turning to illiberal populism and exclusionary nationalism—often in direct conflict with their own economic interests. Rebuilding democratic legitimacy requires transparent, fair, and strategic fiscal policies that strengthen the connection between budgets, collective priorities and citizens’ agency, and that create confidence in improving economic prospects for the future.
The mandate of the nation’s sovereignty,’ declared Emmanuel Macron six weeks into his first term as French president, was ‘the ability to determine one’s own fate, despite the world’s constraints and disruptions.’ He warned that nations risked alienation—to financial constraint, if they failed to restore their budgets and reduce public debt; and to the will of other countries, if they did not succeed in putting their affairs in order.
In this respect, President Macron has been proved correct, albeit not in the way that many expected. Eight years later, that sense of alienation has spread from presidential rhetoric to public opinion, plunging the Fifth Republic into an ‘existential’ political crisis. France is not alone in this; other developed democracies are experiencing similar issues. Citizens in the US and much of Europe have lost confidence in their governments’ ability to uphold the social contract—viz., to use taxes and deficits to finance growth-enabling infrastructure, provide high-quality public services in health and education, and maintain an acceptable level of inequality within society. The perceived loss of fiscal control, as reflected in high budget deficits and rapidly mounting public debt (see table below), has been crowding out fiscal space, thereby exacerbating the broader erosion of trust in democratic institutions and the social market model itself. The resultant confidence crisis, deepened in the aftermaths of the post-2008 global financial crisis and the COVID-19 pandemic, has fuelled the resurgence of nationalism and authoritarian tendencies, bringing to power governments that flirt with post-democratic practices reminiscent of the 1930s.
The shrinking space of democratic choice
Budgetary control is not just an accounting issue; it determines fiscal space, growth potential, and political independence. Some countries, such as the US (with a nationalist government in power) or the UK (with a nationalist party leading the polls), have to spend over 10 per cent of their budget on interest payments alone, complicating efforts to fund properly policies and programmes of public appeal (such as the funding on health services, now the key to potential negotiations on ending the government shutdown). The American Congressional Budget Office has shown that, for two years in a row, interest payments exceed the spending on defence. Throughout much of the post-Cold War era, social-market democracies—including Anglophone countries with more laissez-faire economies—have sought to balance economic efficiency with social solidarity: governments could tax, borrow, and redistribute wealth while maintaining citizens’ trust. This politico-economic equilibrium’ has been evidenced by electoral outcomes that saw the alternating success of centre-right and centre-left parties fully committed to democratic principles. The principal success in economic policies, which—in the voters’ eyes only required ‘fine-tuning’ on the margin—has lent credibility to centrist politics. Voters accepted institutions, principles, and policies because they believed their elected representatives had agency.
However, this broad consensus has become fragile over the past two decades. The anti-immigration rhetoric that surrounded the Brexit vote in the UK and the 2016 US presidential election marked the beginning of a new era of nationalism. This has led to a decline in global commitment to supranational cooperation, as well as an assault on the rules-based world trade system, dampening growth potential and restricting further already limited fiscal flexibility. Faced with the ‘alternative realities’ of populist challengers, governments led by political parties of the democratic centre have started presenting political decisions as having no alternative. Yet this approach has caused them to lose intellectual rigour and communicative discipline.
Over the past two decades, however, this broad consensus has frayed. The Brexit vote in the UK and the 2016 US presidential election, both with campaigns that were fuelled by anti-immigrant rhetoric, marked the beginning of a new nationalist era. In its wake, the global commitment to supranational collaboration has been weakened, dampening growth potentials and exacerbating the narrowing of available fiscal spaces. Challenged by the alternative realities of populist challengers, governments led by parties of the democratic centre have resorted to framing policy choices as lacking viable alternatives, thereby loosing intellectual rigour and communicative discipline.
This shift has had profound psychological consequences. Increasingly stringent budgetary constraints further exacerbated the situation and placed governments in a political and economic dilemma. Neither unpopular budgetary consolidation measures nor unsustainable financial generosity could reverse the growing support for nationalist movements. On the contrary, emergency measures, particularly the bank bailouts after 2008, reinforced the impression that political decisions were being made in line with the priorities of the establishment or external factors beyond the control and influence of national governments. This made voters feel overlooked and disregarded. When people doubt their governments’ ability and willingness to use public funds efficiently and purposefully, they begin to question everything they do. This paves the way for pseudo-solutions from right-wing extremists. One example of this is the attempted exchange of government bonds for interest-free ‘century bonds’, enforced through political pressure, which is intended to conceal sovereign insolvency.
From economic realism to political cynicism
The combination of the political polarisation, the rising economic pressures on wage-earning households and small- and medium-sized enterprises, and increasing signs of neglect of public infrastructure and government services have created an environment in which populists thrive. Nationalist movements in particular have portrayed budgetary constraints as a loss of sovereignty and claimed that only they can ‘regain control’ from technocrats or foreign creditors. This approach helps populist governments to disguise regressive economic policies that harm the economic interests of their own supporters and are typically implemented against a backdrop of emotionally charged politics focused on social exclusion and xenophobia. Relevant historical experience has shown that emotional resonance outweighs rational arithmetic, providing an important political instrument to transcend the traditional left/right divide. By presenting politics instead as a conflict between globalists (the establishment, the ‘deep state’) and ordinary citizens (having maintained ‘common sense’), nationalist movements and governments shaped a potent political propaganda that aims at making voters respond to unsubstantiated fears from a morally corrupt élite and rising threats from social and/or ethnic minorities. This creates a political mirage, behind which economic constraints—such as debt ratios, interest payments, and limited budgets for public services—serve as emergency context to dismantle key pillars of the welfare state, as currently seen within the context of the US government shutdown.
Without the political agitation and concomitant creation of emergency situations, political parties in the democratic centre find themselves straightjacketed by budgetary constraints, the need to respond to emerging geopolitical and climate challenges, and the complexity of managing the polycrisis. Presenting policy choices as having no alternatives—even when factually correct—has been widely perceived as lacking competence rather than acknowledging complexity. As a result, austerity fatigue, often exacerbated by inadequate or ineffective communication, tends to escalate into more widespread political exhaustion. Not only the political situation in France but also polling across Europe confirms this trend: in countries where fiscal oversight has been least visible since the global financial crisis, mainstream parties—conservatives and free-market liberals on the centre-right and social democrats on the centre-left—are under existential threat. In France, for instance, the last run-off between Presidential candidates from the traditional parties of the centre-right and centre-left has been in 2012.
In short, public debt is about more than just figures in a ledger. It determines fiscal obligations, affects equity, and limits redistribution; it defines who pays and who benefits. In the social-market tradition, public debt was justified as an intergenerational contract extending over longer timeframes. Borrowing today would mean investing for the future and offering a higher internal rate of return than the cost of servicing the debt. However, when it appears that borrowing serves the interests of financial élites rather than citizens, or is used to finance consumption rather than investment, the moral basis of this contract frays and disintegrates.
Technocracy’s unintended politics
As the fiscal space narrows and security- and climate-related obligations widen, policymakers seek refuge in the delegation of politically sensitive decisions to independent institutions, such as central banks, fiscal councils, or automatic stabilisers. Even though this is often done for good reasons (primarily to maintain price stability), these agreements protect politicians from having to explain the reasons for difficult decisions to adjust policy and stabilise markets. Their communicative insulation, however, breeds alienation. While austerity enforced by algorithm may reduce risk premia and satisfy creditors, it undermines democratic consent. Technocratic governance has produced relative stability in periods of crisis response, through the design and coordination of Keynesian responses and quantitative easing. However, while immediate results were encouraging, the longer-term ‘democratic’ costs have been considerable and keep on rising. Too often, voters have perceived fiscal decisions as mere compliance exercises rather than political choices. Each time a difficult policy measure is defended as being ‘required by Brussels’ or ‘necessary to reassure investors’, political legitimacy is being eroded. Paradoxically, institutions intended to safeguard credibility have ended up undermining it.
Built on the legacy of fascism and war, the social-market economies have proved more successful than any alternative in reconciling market-based growth with increased egalitarianism in opportunity and equality in outcome. Fiscal autonomy enabled redistribution. Trust could be sustained in both markets and governments. However, the loss of fiscal autonomy has been disrupting this balance. Under pressure, governments in advanced economies tend to cut important investments in areas such as education, health, housing and local services in order to consolidate their budgets. In doing so, they neglect the crucial importance of these areas for community cohesion. Citizens have interpreted this not as fiscal prudence but as political neglect. At the same time, social programmes were cut under the pretext of laziness or the migration pull factor. This took place against a backdrop of increasing geopolitical uncertainty, immigration pressure, and displacement effects caused by rising debt servicing costs. The social contract and, with it, the state’s moral authority disappear, allowing democratic legitimacy to be lost and doors to the resurgence of nationalism and intolerance opened.
To counteract this, today’s policymakers must aim at developing fiscal policies and consolidation measures in such a way that they can be communicated as necessary, are considered fair, and, ultimately, promise benefits in the future. To this end, the World Bank is working on the ‘Reimagining Public Finance’ initiative, for example. It seeks to provide policymakers with a set of tools to strengthen the link between resources and policy outcomes. After all, if these criteria are not met, even well-intentioned measures can have disastrous political consequences. To build trust, modern fiscal policy must fulfil at least three guiding principles:
Reclaiming the story of control
Democracy cannot survive on constraint alone. To restore trust, political parties of the democratic centre must define budgetary discipline as collective strengthening and an expression of state independence, rather than an act of submission. A sound budget should signal that it is citizens, not markets, who set priorities. Post-war Europe offers a valuable precedent in this regard: fiscal discipline was paired with institution-building, such as properly functioning markets, the welfare state, public investment, and social dialogue. It came, as argued by Germany’s minister of economy in 1957, with the promise of ‘prosperity for all’, linking productivity gains with correspondingly rising wages. This ensured that electorates understood the limits and purpose of fiscal discipline, as well as their obligations and entitlements. Modern governments can emulate this approach by linking financial reforms to specific objectives. Possible goals include reducing child poverty, providing high-quality healthcare, creating affordable housing, financing green infrastructure, and securing pensions. Citizens defend rules that they perceive as serving shared goals.
The recovery of the political centre depends on restoring coherence between fiscal realism and social aspiration. Populists thrive when moderates seem to be little more than accountants. By contrast, legitimacy can be restored when budgets reflect citizen agency. Macron’s warning about alienation, including that caused by financial constraints, continues to resonate. The real crisis is political as well as fiscal. In order for society to be able to stem the erosion of trust in democratic institutions and social-market economies, voters must be empowered to exert greater influence over public finances.
Restoring fiscal sovereignty is therefore a democratic imperative. Budgets must express collective priorities, uphold fairness, and demonstrate stewardship of the future. Only when citizens feel that fiscal policy is theirs—crafted by their representatives for their society—will trust return, and democracy regain its moral and functional authority. The alternative is already visible today: nationalist governments dismantle the rule of law, raze public institutions, and hollow out the social contract, thereby undermining the very confidence that sustains investment, innovation, growth, and employment. Given the mounting evidence that ‘populist leaders are bad for the economy’, policymakers would do well to heed James Carville’s timeless advice to Bill Clinton’s Presidential campaign in 1992: ‘It’s the economy, stupid!’
Jan-Peter Olters
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