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F&L Blog – Revisiting Polanyi’s Warnings

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Revisiting Polanyi’s warnings: How Austerity contributed to Fascism in Interwar Austria

by Maria Markantonatou

20.11.2025

The rise of authoritarianism in interwar Austria is often explained through economic collapse and social conflict. But could austerity measures themselves have played an independent role in destabilizing democracy? In this blog piece, Maria Markantonatou draws on Karl Polanyi’s writings to revisit the League of Nations’ “Financial Reconstruction of Austria,” a radical austerity program that imposed wage cuts, mass dismissals, and shrinking public services. As Polanyi argued at the time, liberal elites embraced “authoritarian interventionism” to protect the economic order, weakening democratic institutions and paving the way for Austrofascism. The dismantling of Red Vienna, the civil war of 1934, and the suppression of the Left were all intertwined with externally imposed austerity. The parallels with contemporary fiscal adjustment programs suggest that today, too, technocratic austerity threatens democratic resilience. The question now is whether governments will confront these risks or repeat the errors of the past.

"Polanyi shows how austerity contributed to social breakdown and authoritarianism, blocking democratic and socialist alternatives. He offers a starting point to critique today’s fiscal adjustment programs – their ideological pattern, historical roots, and devastating impact on democracy."

Austria is once again entering a debate over austerity. Under the EU’s fiscal governance framework, the Austrian government is required to implement consolidation measures in the coming years, including reductions in public spending and welfare services. These measures are presented as technical necessities, but historical experiences show how austerity can fracture societies and fuel political extremism. A glance back at interwar Austria – where externally mandated austerity played a decisive role in democratic collapse – offers critical insights into the risks embedded in today’s fiscal debates.

In the first F&L blog article, Clara Mattei and Aditya Singh argued that Mussolini’s rise in interwar Italy was enabled by a liberal establishment convinced that “only an authoritarian state could defend the capital order in a country like Italy – where revolutionary energy among workers and peasants had reached a boiling point”. The authors conclude that the Italian 1920s demonstrate “the deep structural affinities between liberal and fascist economic policies.” 

The 1920s “Financial Reconstruction of Austria”

A similar point can be made for interwar Austria. In 1922, the League of Nations (LoN), together with domestic liberal elites, launched the “Financial Reconstruction of Austria” program —the first peacetime experiment in technocratic international economic governance by a supranational actor. The program imposed harsh austerity measures, such as wage cuts and public sector retrenchments, which fueled deep political polarization and led to the rise of Austrofascism and civil war. Parallels with contemporary austerity programs show that, now as then, policies of imposed austerity undermine democratic institutions and empower authoritarian politics.

Polanyi, writing in Vienna for the financial journal Der Österreichische Volkswirt, observed these developments firsthand.  He argued that the liberal attempt to insulate the economy from politics produced an “antagonism” between capitalism and democracy—one that culminated in fascism. Central to this antagonism was what Mattei and Singh describe as “the most Polanyian of all insights”: that free markets were never natural, but politically constructed. In the case of the LoN program, this construction assumed the form of what Polanyi called “authoritarian interventionism”, of which the stubborn support by economic liberals “had resulted in a decisive weakening of the democratic forces which might otherwise have averted the fascist catastrophe” (Polanyi 2001: 242).

The LoN program introduced sweeping austerity and liberalization, leading to unemployment, weakened social services, and political tensions. It began with a request to the LoN by the Austrian Christian-social Chancellor Ignaz Seipel, a Catholic priest. Seipel (in LoN 1922: 19–20) presented Austria’s situation before the LoN Council and asked for financial assistance to address hyperinflation, fiscal crisis, and insolvent banks. In his speech, Seipel appealed to the LoN describing Austrians as people “who have endured such terrible suffering and who are perhaps even more crushed by fear for the uncertainty of their future than by the physical misfortunes of the present time [and]are menaced by actual decimation through hunger and cold”. For Seipel (in LoN 1922: 20), the crisis was “unique in the financial history of the world”, as high exchange rates blocked imports of essential goods such as corn, sugar, and coal, causing shortages. The LoN offered loans but demanded the creation of a commission of experts to control their use. Seipel (in LoN, 1922: 22) accepted that such a control would be “inevitable and natural,” but only if “sufficient credits were granted at the same time.” Ultimately, the LoN assumed control of Austria’s budget.

From Budget Control to Monetary Chaos

Historians Stephen Gross and Chase Gummer (2014) describe how Austria, reduced from a Habsburg Empire of 50 million to a small republic of seven million, struggled with a disintegrating currency and chaotic monetary fragmentation. The successor states stamped the old Habsburg krone notes to separate their currencies from the imperial krone, but such measures quickly created monetary chaos. Economic liberals deemed it urgent to stabilize the currency, reduce capital flight and war-related deficits, and stimulate growth.

The LoN appointed a Commissioner-General to supervise the program known as the Genfer Sanierung. His team oversaw the budget and the reforms in banking and public administration, approved loan tranches, and reintroduced the gold standard. To receive loans, social services and the public sector had to be cut.

The LoN blamed the “excessive number of [state] employees” as the main cause of Austria’s crisis. This led to a reduction of Federal Ministries and the dismissal of 100,000 officials within two years. A similar argument was used to justify cuts in the highly unionized railway sector. The LoN blamed the City of Vienna too, for having more state employees than when she was the capital of an empire.

[T]he LoN demanded the suppression of resisting social groups, trade unions, and political opponents, and the imposition of emergency legislation. The reforms required “a strong and fearless Government”, with the “duty not to hesitate to go forward with the necessary measures”

Ironically, the initial wave of dismissals raised public expenditure rather than lowering it, due to severance and pension obligations Covering these costs required another loan and, as a consequence, new austerity measures. Access to foreign capital markets re-opened, but the economy deteriorated again with the 1929-1930 global financial crisis. The collapse of the Creditanstalt bank in 1931 led to rapid capital flight and market panic, which necessitated another loan from external lenders, and further deepened Austria’s dependence on foreign debt assistance.

Notably, restriction of economic sovereignty did not imply a weak state. On the contrary, a strong state was considered necessary, as the LoN demanded the suppression of resisting social groups, trade unions, and political opponents, and the imposition of emergency legislation. The reforms required “a strong and fearless Government”, with the “duty not to hesitate to go forward with the necessary measures” , without “any political considerations” (LoN 1923: 10). Even after the assassination of Chancellor Dollfuss in 1934, loans continued to require further retrenchment, including new cuts to social services and pension rights.

Liberal Attacks on Red Vienna Paved the Way for Civil War

While Seipel negotiated the loan conditions with the LoN in Geneva, Red Vienna pursued a very different project: As the historian John Lewis recounts,“the Viennese authorities were developing a system of progressive taxation, which effectively shifted the bulk of the fiscal burden from the working classes (…) to the bourgeoisie”.

Red Vienna flourished in the 1920s, after the Social Democratic Workers’ Party’s victory in the 1919 local elections. Housing policies addressed poor working-class conditions: dwellings had typically consisted of a kitchen and a sleeping room, without gas and running water, while washing facilities were communal – conditions linked to tuberculosis and high mortality. From 1923 to 1927, the city council built over 25,000 small but modern units. These improved living standards but met resistance from landlords, who accused socialists of Steuersadismus (tax sadism) and of ruining the private housing market.

Conflicts between the Viennese authorities and the LoN’s supporters, who opposed the housing program, contributed to the Austrian civil war of 1934. This is why Polanyi (2001: 98) writes that Red Vienna “was bitterly attacked by economic liberals” and “succumbed under the attack of political forces powerfully sustained by the purely economic argument.” He criticized liberals who claimed that Vienna was merely an “‘allowance system’ which needed the iron broom of the classical economists”. When Red Vienna fell, “the Heimwehr victory in Austria formed part of a total catastrophe,” Polanyi notes regarding the civil war and the total crisis.

Polanyi writes that Red Vienna “was bitterly attacked by economic liberals” and “succumbed under the attack of political forces powerfully sustained by the purely economic argument.”

As social polarization deepened, Chancellor Dollfuss shut down Parliament in 1933. In 1934, a brief but devastating civil war erupted in Vienna, Linz, and Graz between state forces – supported by the paramilitary, rural-fascist Heimwehr – and the Social Democratic Party’s militia (Schutzbund). These events reflected efforts of domestic elites and the LoN to dismantle the Left and Red Vienna. As the British foreign correspondent Gedye (2009 [1939]: 12) put it, “the first thing was to get foreign money into the country, the second to persuade international finance (…) that its money would never be really safe until the power of the Left had been broken down.”

Polanyi agreed with this assessment that austerity was tied to anti-socialist politics: “[the Austrian government] never relaxed its pressure against the Left. The attack upon the position of the Left was carried several stages further. The Socialist press, the Social-Democratic Party, social services, rights of collective bargaining, the legal standing of public servants (…), the finance of the Municipality of Vienna, all had to suffer.” In his text, Austria and Germany, Polanyi follows the events after the 1933 German elections that paved the way to the Austrian Anschluss: pressure from Germany and Italy on Austria, the Austrian government’s Pronunciamento (banning public gatherings and imposing press censorship), far-right groups gaining power, and instability. The LoN’s interventions fueled polarization, empowered liberal economics, and repressed the labour resistance and socialist planning. While liberalism viewed markets as the only rational mechanism, Polanyi defended the socialist “overview” of production by communes, unions, and workers’ councils. In his seminal work The Great Transformation, Polanyi (2001: 265) argues that only their suppression paved the way for capitalist restoration and fascism:

“It was as a result of [the liberals’] efforts that big business was installed in several European countries and, incidentally, also various brands of fascism, as in Austria. Planning, regulation, and control (…), were then employed by the confessed enemies of freedom to abolish it altogether. Yet the victory of fascism was made practically unavoidable by the liberals’ obstruction of any reform involving planning”.

Interwar Austria as Forerunner to IMF and Eurozone-imposed Austerity

As the economic historian Charles Kindleberger (2006: 321) notes, “the LoN staff in Austria can be thought of as a forerunner of IMF stabilization advice to countries with balance-of-payments and stabilization problems after the World War II”. Following the war, the pattern of economic governance through “bailouts” was institutionalized: conditionality in the provision of loans to countries in need, with the poor paying the heavy price of austerity. The IMF intervened in a series of countries in Latin America (Argentina, Bolivia, Brazil, Chile, etc.), in Africa (Ghana, Morocco, Nigeria, etc.), in Asia (Bangladesh, Indonesia, Malaysia, Thailand, etc.), and elsewhere (Remmer 1986; Garuda 2000).

Similarly, during the Euro crisis in 2010, the “Troika” (EC, ECB, IMF) provided loans and imposed austerity measures on Greece, Portugal and Cyprus. With this austerity-led crisis management, especially in Greece, came attacks on democracy and suppression of social resistance while far-right forces and parties expanded their influence. Privatizations increased, heavily impacting working classes and the public sector, and further weakening a welfare state already diminished from decades of neoliberalization.

The Lessons for Today’s Fiscal Adjustment Programs

Polanyi shows how austerity contributed to social breakdown and authoritarianism, blocking democratic and socialist alternatives. He offers a starting point to critique today’s fiscal adjustment programs – their ideological pattern, historical roots, and devastating impact on democracy . The parallels of current austerity programs with interwar Austria suggest that authoritarianism and even fascism are not deviations from capitalism but recurring possibilities within it.

Maria Markantonatou is Associate Professor of Political Sociology at the University of the Aegean, Lesvos, Greece

References

  • Garuda, G. 2000. The Distributional Effects of IMF Programs. World Development, 28: 6
  • Gedye, G.E.R. 2009 [1939]. Fallen Bastions: The Central European Tragedy. London: Faber and Faber
  • Gross, S., Gummer, C. 2014. Ghosts of the Habsburg Empire: Collapsing Currency Unions and Lessons for the Eurozone. East European Politics and Societies and Cultures. 28: 1
  • Kindleberger, C. 2006. A Financial History of Western Europe. London: Routledge
  • League of Nations. 1922. The Restoration of Austria. Agreements. Geneva
  • League of Nations. 1923. Financial Reconstruction of Austria. First Report by the Commissioner-General of the LoN at Vienna. Extract no 11
  • Lewis, J. 1983. Red Vienna: Socialism in One City, 1918-27. European History Quarterly. 13
  • Mattei, C., Singh, A., Unmasking the dehumanizing logic of the capital order, International Karl Polanyi Society, 07.08.2025, Available Online: https://www.karlpolanyisociety.com/2025/08/07/fl-blog-mattei-singh-unmasking-the-dehumanizing-logic-of-the-capital-order/
  • Polanyi, K. 1933. Austria and Germany. International Affairs. 12: 5, Karl Polanyi Archive 18-2
  • Polanyi, K. 2001. The Great Transformation. Boston: Beacon Press
  • Remmer, K. 1986. The Politics of Economic Stabilization: IMF Standby Programs in Latin America, 1954- 1984. Comparative Politics, 19: 1

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F&L Blog – Profiting from Neoliberalism

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Profiting from Neoliberalism: How the Radical Right Gains From Crumbling Public Services

by Simone Cremaschi

23.10.2025

The rise of the far right is often linked to economic decline and depopulation of “left behind regions”. But could public service cuts, as part of broader neoliberal austerity policies, play an independent role? In this blog, Simone Cremaschi cites research he and his colleagues have conducted into otherwise similar municipalities in Italy, which, for varying reasons, underwent significantly different levels of public service cuts. They found evidence that regions with steeper retrenchments recorded higher shifts in support for the far-right. Using zero-sum logic, far-right parties have been able to frame shrinking services as a problem of demand, not supply. This suggests that restoring and rebuilding public services could halt the rise of the far-right. The question now is whether mainstream parties will re-build the credibility and support to do so.

Public services across Western Europe are under strain. Years of economic stagnation, financial crises, a pandemic, and rising energy prices have left governments with record debt and soaring interest payments. As a growing share of tax revenue is swallowed by debt service, less remains for hospitals, schools, and local infrastructure. These constraints leave little room to reverse a decade of neoliberal-imposed austerity, which closed or hollowed out key public services – from rural post offices and public transport links to police stations and GP practices in major cities.

One might expect these conditions to benefit parties on the left, traditionally associated with calls for higher public spending and stronger social support. Yet a series of empirical studies I have conducted with co-authors shows that reduced access to public services – what we call public service deprivation– often fuels support for radical-right parties instead.[i] This political backlash to service cuts helps explain why these parties have made such significant inroads into mainstream politics in the past years.

We began our research in Italy, where policy debates in recent years have devoted considerable attention to so-called “inner areas” – areas marked by economic stagnation, depopulation, and isolation from essential services such as schools, hospitals, and train stations. These territories struck us as the concrete embodiment of the “left-behind places” often invoked by journalists to explain the geographic concentration of support for radical-right leaders like Donald Trump, or the Brexit referendum. This led us to ask whether the availability – or withdrawal – of public services could be driving this geography of discontent.

How Public Service Deprivation Fuels Exclusionary Politics

"public services are the primary channel through which citizens interact with the state [...] their decline strikes at the heart of the social contract. These grievances translate into a demand for solutions at the ballot box, creating fertile ground for parties that promise to restore services by reallocating them toward “deserving” locals."

We began answering this question by studying a 2010 reform that required Italian municipalities below a fixed population threshold to deliver key public services – such as policing and waste collection – jointly with neighboring municipalities. Because of an arbitrary cut-off, it created a natural experiment: some municipalities were forced to amalgamate services while others of a similar size were not. This allowed us to compare municipalities in these two groups across time and isolate the effect of reducing public services on electoral outcomes. Our results, published in the American Journal of Political Science [ii], show that this reform ultimately reduced access to essential services and, in turn, boosted support for radical-right parties such as Salvini’s League among affected voters in the years that followed.

Our analysis suggests that public service deprivation fuels radical-right support by generating grievances that resonate with political rhetoric linking declining services to immigration. When communities accustomed to reliable public provision – as is common in Italy and Western Europe – experience sudden deterioration, they develop a sense of unfairness and neglect: a perception that “their” community is no longer receiving its fair share of resources and that political elites do not care. Because public services are the primary channel through which citizens interact with the state and observe how their taxes are spent, their decline strikes at the heart of the social contract. These grievances translate into a demand for solutions at the ballot box, creating fertile ground for parties that promise to restore services by reallocating them toward “deserving” locals.

Radical-right parties have proven particularly adept at meeting this demand. In our data, we show that they increasingly mobilized the issue of public services after the 2010 reform in Italy, framing service decline as a consequence of immigration and of a state that prioritizes “undeserving outsiders” over “deserving locals.” Even though immigrants are not the primary drivers of service retrenchment, this rhetoric resonates with zero-sum thinking triggered by service cutbacks, because public services are difficult to exclude users from. Consistent with this mechanism, we find that attitudes toward immigrants worsened in municipalities affected by the reform, helping to explain why voters in these areas shifted toward parties such as the League.

How Public Services Shape Political Reactions to Economic Shocks

Public services matter not only because their decline directly pushes voters toward the radical right, but also because they shape how communities respond to other crises. Economic shocks – from import competition to de-industrialization and technological change – are well-known triggers of discontent that radical-right leaders can mobilize. When communities have long felt neglected by the state, these shocks are more easily interpreted as yet another sign of abandonment, paving the way for a radical-right turn. We document this dynamic in a study recently published in the American Political Science Review [ii].

In this study, we turn to Xylella, a plant disease epidemic that exterminated olive trees in southern Puglia (the heel of Italy’s boot) between 2014 and 2016. As with the 2010 public service reform, this epidemic created a rare natural experiment. The bacterium arrived by chance on a boat from Costa Rica, landing in the port of Gallipoli, and spread northward, killing millions of trees before containment measures halted its advance roughly 200 kilometers away – leaving neighboring olive-producing regions largely untouched. This sharp boundary gave us a unique opportunity to compare affected and unaffected areas before and after the shock – something rarely possible since most economic shocks unfold gradually and across much larger regions. Our results show that this had similar electoral effects to other economic shocks observed across the United States and Western Europe, increasing support for radical-right parties – most notably Meloni’s Brothers of Italy – across affected areas.

"When communities experience prolonged public service deprivation, they develop a community narrative of abandonment by the state and political elites."

Our analysis explains why the plant disease epidemic led to a radical-right turn by highlighting the key role of public services. Combining statistical analysis with qualitative fieldwork in the most affected municipalities, we show that the epidemic not only disrupted a vital economic sector but also uprooted community life and identities that had been built over centuries around olive cultivation and oil production. The sudden extermination of olive trees generated deep concerns about the future of these communities, heightening the appeal of radical-right narratives that frame political elites as indifferent and promise to restore the status of neglected areas. Crucially, this effect was not uniform: we find that communities with a history of poorer access to public services were significantly more likely to shift their support toward radical-right parties.

Because public services are the primary channel through which citizens interact with the state, the level of service access available to a community shapes how residents see themselves and their relationship with public institutions. Over time, collective identities become embedded in the stories people tell each other about the place where they live. These stories, passed among neighbors and across generations, form a shared lens for interpreting new events. When communities experience prolonged public service deprivation, they develop a community narrative of abandonment by the state and political elites. In the case of Xylella in Italy, areas that had internalized this narrative interpreted the epidemic as yet another instance of state neglect. This interpretation resonated strongly with radical-right messaging, amplifying the turn toward radical-right parties in the wake of the shock.

How the Radical Right Gains Across Europe

"Finding credible and popular responses to public service decline remains a key political challenge in the years ahead, but one we surely must tackle if we are to halt the continued rise of the radical right."

Rising radical-right support in response to public service cuts is not just an Italian story. Across Europe, researchers have shown that when schools or hospitals close – as in parts of Germany and Denmark – trust in the state falls and radical-right parties gain ground [iii, iv]. Another study, recently published in the American Journal of Political Science [v], finds that austerity measures across Europe – often targeting public services – boosted radical-right voting in economically vulnerable regions.

England offers a particularly telling example. The National Health Service (NHS) is one of the largest publicly funded health care systems in the world, a clear symbol of the state’s duty to care for its people and one widely supported across the political spectrum. Yet public satisfaction with the NHS is sinking to its lowest level. A key source of frustration has been the steady disappearance of local doctors’ offices: since 2013, nearly 1,700 GP practices have shut down or merged – more than a quarter of England’s local clinics.

In a new study, we find that these closures have fuelled support for the radical right. Using data on every GP practice closure since 2013, we show that voters affected by closures report worse experiences with the health system and become more likely to support parties like UKIP and Reform UK. Examining political messaging, we find that these parties have effectively connected NHS pressures to immigration in their discourse. And, indeed, the shift toward the radical right is strongest in places with higher immigration, where the narrative of “outsiders overloading the system” resonates most.

This case shows that the dynamics we uncovered in Italy are not limited to extraordinary moments such as sudden reforms or economic shocks. The crisis of the NHS has been unfolding for decades and is likely to persist, driven by rising public debt and growing demand from an ageing population. These long-simmering grievances are once again being harnessed by political entrepreneurs who link them to immigration – a strategy that continues to fuel radical-right support.

Taken together, this body of research challenges the common expectation that declining public services should lead voters to demand more redistribution and flock to left-wing parties. Instead, we find that public service deprivation often fuels support for exclusionary – radical-right – parties. Their successes threaten the rights and protections of minority groups such as immigrants. And as growing evidence shows, they also contribute to the progressive erosion of democratic norms.

Several factors limit how mainstream parties can respond to radical-right gains over public service decline. Reversing service cuts usually implies higher taxes – a remedy that remains unpopular. Credibility is another hurdle: after decades of decline, promises to rebuild public services can ring hollow when they come from parties that previously oversaw the cuts. The radical right, by contrast, offers a deceptively simple solution: reduce demand by excluding “undeserving” outsiders, often immigrants. This rhetoric has proven both powerful and persuasive. Finding credible and popular responses to public service decline remains a key political challenge in the years ahead, but one we surely must tackle if we are to halt the continued rise of the radical right.

Headshot Cremaschi

Simone Cremaschi is a political scientists studying topics in comparative political economy, political behavior, and political sociology. He works as a postdoctoral researcher at Bocconi University and the Dondena Centre.

References/Further Readings

  • [i] Cremaschi, Simone, Paula Rettl, Marco Cappelluti, and Catherine E. De Vries (2024). “ Geographies of Discontent: Public Service Deprivation and the Rise of the Far Right in Italy.” American Journal of Political Science.
  • [ii] Cremaschi, Simone, Bariletto, Nicola, and Catherine E. De Vries (2025). “Without Roots: The Political Consequences of Collective Economic Shocks.” American Political Science Review.
  • [iii] Stroppe, Anne-Kathrin. 2023. “Left behind in a Public Services Wasteland? On the Accessibility of Public Services and Political Trust.” Political Geography 105: 102905.
  • [iv] Nyholt, Niels. 2024. “Left Behind: Voters’ Reactions to Local School and Hospital Closures.” European Journal of Political Research 63 (3): 884–905.
  • [v] Baccini, Leonardo, and Thomas Sattler. 2025. “ Austerity, Economic Vulnerability, and Populism.” American Journal of Political Science 69: 899–914.
  • [vi] Dickson, Zachary P., Sara B Hobolt, Catherine E de Vries and Simone Cremaschi (2025). Public Service Decline and Support for the Populist Right: Evidence from England’s National Health Service. Working Paper.

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F&L Blog – Balanced Budgets, Broken Democracies

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Balanced budgets, Broken Democracies: the urgent need to democratize money

Colleen Schneider

25.09.2025

Colleen Schneider is a PhD researcher at the Vienna University of Economics and Business in the Institute for Ecological Economics. Her work focuses on the political economy of monetary and fiscal policy in a social-ecological transition. In this piece she explores how ideas about money greatly shape states’ capacity for governance, explaining how the neoliberal ideology of “balanced budgets” has been used consistently and across party lines to justify austerity. As Polanyi saw governments’ adherence to the Gold Standard during the 1930s as enabling the rise of fascism, today’s attachment to arbitrary fiscal rules risks emboldening the far-right while worsening social and ecological crises. To counter this, Schneider calls for a “deficit owl” approach to budgeting focused on the effects of fiscal spending, supported by a politicization and democratization of money.

“The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity. Money will cease to be master and will then become servant of humanity.”
Abraham Lincoln, 1985
“Well, we’re out of money now.”
Barak Obama, 2009

How ideas about money shape the capacity to govern ​

For the last 5,000 years money has served as a tool of governance. Through the Middle Ages Monarchs regularly reminted coins to increase the money supply, often to fund war. This was possible because the value of coinage was set by political decree and reinforced by trust in the governing authority. Today, we operate in a fiat money system, meaning that money is created through the spending of currency-issuing governments. Governments’ ability to create money is limited by ideas about the desirability of fiscal spending and the role of government debt.

Ideas about money shape the potential and structure of governance. The idea of “balanced budgets” has delimited the political imaginary of the last several decades. The shift to understanding balanced budgets as a good in-and-of themselves, and to the institutionalization of this idea, is a core tenet of the neoliberal era. It has been used, consistently and across party lines, to justify austerity. This includes cuts to social welfare programs as well as spending cuts on necessary public infrastructure, health, and education.  

To illustrate the importance of these ideas and how they shape the capacity for governance, we can define three distinct positions. The first two are orthodox positions of “deficit hawks” and “deficit doves.” Hawks insist government deficits are always problematic. Their thinking goes that when governments spend more than they receive in taxes, they “crowd out” private sector spending, ultimately leading to lower growth and risking default. In contrast, doves acknowledge running government deficits can be useful and necessary in the short term, such as during recession. Like hawks, they hold with the position that balanced budgets should be prioritized in the longer term. Both hawks and doves present this constraint not as a political rule, but as economic law.

The third position is that of “deficit owls.” Owls see the constraints on spending by sovereign currency-issuing governments as access to real resources, their ability to maintain price stability, and political will. Owls place the focus on the results of fiscal spending. For governments (or supra-national regions, like the Eurozone) that issue their own currency, hard limits come into play if there is a need to access foreign currency for, say, import purchases or paying foreign-denominated debts. Utilizing domestic resources, however, is constrained by the availability of those resources and the effects on the macroeconomy—namely, inflation. Owls point out that public sector deficits are nothing more than private sector surpluses. Running public surpluses, thereby driving the private sector to take on more debt, has consistently preceded recessions.   

In short, politically imposed limits on debt and deficits are the result of certain ideas about money, and of political decisions taken in specific historical and ideological contexts. In our present case, the hegemonic status of neoliberal ideology has provided the container for institutionalizing fiscal limits.

The neoliberal de-democratization of the monetary system stripped money as a tool of governance

The post-WWII Keynesian era of fiscal dominance relied upon democratic coordination for macroeconomic stability. In contrast, the 1980s were marked by a distinct shift in how the monetary system was understood and operationalized as a governance tool. Under neoliberalism, politically-embedded management of the monetary system was replaced with technocratic management and a reverential deference to bond markets. This construction of monetary scarcity can be understood through the apparent “naturalization” and “depoliticization” of money that is central to the neoliberal project. This logic found academic justification in the neoclassical treatment of money as a neutral veil over market exchange.

This naturalization of money makes the management of the monetary system a matter of technocratic efficiency best left to economists at “apolitical” and “independent” central banks. Through the shift in central banking and the deference of elected governments to the need for balanced budgets, money as a mode of governance was effectively removed from the democratic political sphere while being simultaneously stripped of morality and subjectivity. Depoliticization went hand-in-hand with de-democratization. 

Balanced budgets paved the way for austerity in the United States and Europe

Following the rhetoric of American Presidents vis-a-vis the fiscal situation of the United States provides an enlightening perspective on the shift toward deference of balanced budgets and its effects. While Lincoln, and those that came after him for the next century, discussed the fiscal budget in reference to its effects in the economy – such as employment and social provision – the 1970s mark a break from this functional understanding of monetary governance.  

In the 1980s Ronald Reagan relied heavily on the rhetorical trope of balanced budgets to impose austerity, pledging to “discipline the federal Government to live within its means”. He signed deficit reduction into law while lowering taxes and cutting spending on housing, education, and agriculture (before going on to enact massive increases in military spending in his second term). George Bush Senior went so far as to attempt to write balanced budgets into the constitution. James Buchanan supported this effort, arguing that it would be an effective and permanent barrier against democratic demands for social spending. This was democracy, insulated from too much democracy—a marker of neoliberal politics.

Buchanan’s effort was not successful, and, in place of constitutional amendment, Bush Senior institutionalized a pay-as-you-go (PAYGO) spending rule, intended to limit fiscal capacity and “solve the problem of budget deficits.”  Clinton, too, oversaw vast cuts and, in some cases, complete withdrawal of social welfare programs in the name of deficit reduction. G.W. Bush then used the“left over” money from Clinton’s budget surplus then to justify tax cuts. Obama focused on the need for fiscal discipline and restored the PAYGO rule.

Both the Democratic and Republican parties have consistently taken the positions of fiscal doves or hawks, treating public goods as liabilities and economic growth as the highest good. The consistent result has been the gutting of social protections.  

The fiscal limits of the European Union—enshrined in the Maastricht Criteria and enacted through the Stability and Growth Pact (SGP)—are emblematic of the de-democratization of monetary governance. Several European states have also enshrined balanced budgets into their constitutions. Switzerland amended their constitution in 2001, and Germany constitutionalized the debt brake in 2009, among others. These limits are not based on any sound empirical relationship between debt, deficits, and growth, while institutionally embedding an incapacity to effectively deal with unemployment, the climate crisis, and myriad other crises.

The COVID pandemic revealed the fragile state of public services in the EU after years of austerity, and the activation of the SGP’s escape clause during the pandemic made clear the extent to which the debt and deficit rules inhibit effective social (and ecological) spending. In 2024 the SGP was revised and reinstated by the European Council with only minor changes, and now imposes an estimated €100 billion in cuts for EU governments, which will hit low-income households hardest.  

From neoliberal balanced budgets to far-right extremism

Just as Karl Polanyi referred to faith in the gold standard as an ideology shared by whole nations in the 19th century, balanced budgets play this role in the neoliberal era. The result is governments that have been heavily constrained in their capacity to address social ills, driving skyrocketing inequality, and escalating ecological crises. A line can be drawn from the disenfranchisement driven by years of neoliberal austerity to recent fascistic counter-movements. Consider the rise of the Golden Dawn party in the midst of the Greek government debt crisis driven by the Troika. Or the rise of Alt-Right groups in the United States in the last two decades.

In The Great Transformation Polanyi blamed the “stubbornness” of economic liberals in prioritizing the maintenance of the gold standard system in the late 19th and early 20th century for the “decisive weakening of the democratic forces that might otherwise have averted the fascist catastrophe”. Polanyi contended that the United States, in leaving the Gold Standard in 1933, showed themselves to be “masters not servants of the currency” and utilized their newfound fiscal capacity to fund the New Deal program. Two converging factors enabled this to happen: a claiming of the fiscal capacity of the government, and a government that was held accountable to the needs of the working class. The New Deal demonstrated how democratic politics and social protection can go hand-in-hand to mitigate the effects of increasing marketization and to forestall shifts toward fascism. Politicization and democratization of the monetary system are essential in this.

With this in mind, we can question where cracks in the ideology of balanced budgets exist today, and toward what ends they are directed.

Deficits for war, not peace?

For decades now neoliberal dominance has delimited the political imaginary. Attempts to question the validity of fiscal rules and to explore alternatives have been dismissed as “unrealistic” or “irresponsible.”  But government responses to the financial crisis of 2007-08 and to the pandemic created cracks in the veneer of “there is no alternative”. Recently, the European Council has granted the activation of national escape clauses specifically for defense spending and, as of July 2025, 15 nations have signed on to this option. This means, simply, that spending on defense is not counted toward debt and deficit limits. A political choice made manifest, while holding on to the rhetorical insistence that the limits are necessary. Following the pause on the SGP during the pandemic, a coalition of EU nations called for social and ecological spending to be permanently exempted from debt and deficit limits, but a stronger coalition pushing “fiscal responsibility” effectively opposed this.  

Donald Trump has stated that he wants to scrap the U.S. debt limit entirely. While he has not managed to do this, the One Big Beautiful Bill Act passed in July 2025 raises the debt ceiling by $5 trillion, and will add an estimated $3.4 trillion to the national debt over the next decade. Most of the economic benefits will go to the rich. The middle class will see little, if any benefit, and poorer households will lose. In doing so, Trump can frame himself as breaking with the (much maligned) status quo, while simultaneously serving corporatist and wealthy financial interests. This is money as a tool of plutocratic governance.  

To confront our crises we must politicize and democratize money

To effectively address the multiple social and ecological crisis of the present day, we must make explicit the political nature of money, and thus the capacity for money as a mode of governance. However—as Polanyi witnessed in Europe in the 1930s and the US is witnessing today—a politicized monetary system can serve as a tool of fascism just as easily as one of socialism. Given this, it is essential that politicization takes place alongside strengthening and expanding democracy, including monetary and economic forms of democracy.

In focusing on the effects of public spending, not arbitrary budget rules, the approach of deficit owls creates a coherent alternative to neoliberal rhetoric, a counter to austerity logic, and offers the capacity to build out robust forms of social protection and effective responses to ecological crises.

Colleen Schneider is a PhD researcher at the Vienna University of Economics and Business in the Institute for Ecological Economics.

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F&L Blog Launch Announcement

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Blog Launch: Fascism and Liberalism - Yesterday and Today

Solveig Degen, Maie Klingenberg & Andreas Novy

31.07.2025

One hundred years ago, Austro-Hungarian economist Karl Polanyi witnessed the collapse of liberal democracies and the rise of fascism in Europe – a development which he famously analyzed in The Great Transformation. Following the onset of the Great Depression in 1929, economic liberalism was on the defensive. The widespread belief that laissez-faire capitalism and the prevailing property relations were without alternative had crumbled after the experience of far-reaching state interventions during World War I. Moreover, the assertiveness of a revolutionary workers’ movement, including its vision of democratic control over production via workers’ councils and the tools of economic planning left the propertied classes in distress. However, not socialist but fascist ideas eventually gained the upper hand in the 1930s in different parts of Europe. Commenting on these developments, Karl Polanyi remarked in 1944[i]:  

 “Planning and control are being attacked as a denial of freedom […]. Yet the victory of fascism was made practically unavoidable by the liberals’ obstruction of any reform involving planning, regulation, or control” – Karl Polanyi 1944, p. 265 

In her acclaimed 2022 book The Capital Order[ii], Clara Mattei shows how austerity served as a key tool for enabling this broader regime change. In the 1920s, austerity was imposed by democratic means in the UK, Germany, and Austria, creating socioeconomic conditions that ten years later were conducive to the rise of fascism. In Italy, however, it was only under fascist rule from 1922 onwards that the austerity agenda of economic liberalism could be implemented. These historical examples reveal a troubling pattern: A hundred years ago, sacrificing democracy and civic liberties to uphold economic orthodoxy seemed justifiable to important parts of the liberal elites. Today, similar anti-democratic dynamics can be observed, which raises urgent questions: Will today’s liberal elites once again forsake political equality and individual freedoms? And will they, once again, open the door to authoritarian, reactionary, and anti-democratic far-right movements? 

Historical analyses show that prominent thinkers of economic liberalism such as John Stuart Mill (1806–1873), Friedrich Hayek (1899–1992), and James M. Buchanan (1919–2013) shared a deep-seated mistrust of decisions made by societal majorities. Many of their beliefs were fundamentally anti-egalitarian, including the convictions that mass democracy endangers freedom and that state intervention is incompatible with market economies.  
Today, the tensions between economic liberalism and democracy are becoming increasingly visible again: neoliberal policies driving privatization and marketization have undermined the capacity of states to address urgent societal challenges, such as widening social inequalities and accelerating climate breakdown. Donald Trump’s administration of neoliberals, billionaires, racists and sexists is taking these anti-public strategies even further, providing a prime example of how economic liberalism and fascism are entangled in protecting societal hierarchies, capital interests, and neo-colonial structures. Despite evident ideological contradictions, unlikely alliances between nationalist figures such as Trump and anarcho-capitalists such as Javier Milei and Peter Thiel appear to flourish.
 
In Europe, we see striking parallels: In early 2025, a potential coalition between the Austrian far-right FPÖ, and the conservative ÖVP was endorsed by the representative of the Federation of Austrian Industries, despite the open challenge of the FPÖ “people’s chancellor” Herbert Kickl of key political and civic liberties, social rights founded in the institutions of liberal democracy, and the welfare state. Whereas the negotiations failed at the last second, an austerity discourse continues to dominate public debate in Austria. In Italy, the ministry of education under post-fascist Giorgia Meloni wants to turn highschoolers’ history curriculum into an appraisal of Western civilization including apologetic and distorted representations of World War II and European imperialism. A few weeks ago, the proposal to grant Italian citizenship to diligent pupils demonstrated chillingly how closely the neoliberal myth of meritocracy and eugenics lie together. All the while, the complete annihilation of civilian life in Gaza is tolerated and, in some cases, actively supported by liberal democracies such as Germany, which continues to authorize arms deliveries to Israel. 
 

With this new blog, we, the International Karl Polanyi Society (IKPS) aim to further investigate and improve our understanding of the relationship between fascism and economic liberalism, both historically and in the present day. Publishing weekly pieces on this topic from key scholars in the field, we aim to contribute to the broader discussion on the rise of contemporary reactionary far-right movements. The blog will provide a platform for discussing central questions such as: What is the connection between austerity and fascism? How do the intellectual foundations of (neo-)liberalism and fascism converge, and what are tensions and contradictions? What has been the role of neoliberal thinkers in furthering far right agendas? And, in the words of Karl Polanyi, is the rise of current far-right movements again “made practically unavoidable by the liberals’ obstruction of any reform involving planning, regulation, or control”? 

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i Polanyi, K. (2001). The great transformation: The political and economic origins of our time. Beacon Press. (Original work published 1944) 

ii Mattei, C. E. (2022). The capital order: How economists invented austerity and paved the way to fascism. University of Chicago Press. 

Andreas Novy

Andreas Novy is is associate professor and head of the ISSET Institute at WU Vienna and president of the International Karl Polanyi Society (IKPS).

Maie Klingenberg is a research assistant at the ISSET Institute at WU Vienna working on the democratization and deprivatization of provisioning systems.

Solveig Degen is a PhD student at the Centre for Social Critique in Berlin working on the socialisation of public services.