Are there Political Budget Cycles in the Euro Area?
| Published date | 01 June 2006 |
| Author | Jakob de Haan,Mark Mink |
| DOI | 10.1177/1465116506063706 |
| Date | 01 June 2006 |
| Subject Matter | Articles |
Are there Political Budget
Cycles in the Euro Area?
Mark Mink
University of Groningen, The Netherlands
Jakob de Haan
University of Groningen, The Netherlands, and CESifo, Munich,
Germany
ABSTRACT
This article examines whether there is a political budget
cycle (PBC) in countries in the euro area. Using a multivari-
ate model for 1999–2004 and various election indicators we
find strong evidence that, since the start of the Stability and
Growth Pact, fiscal policy-makers in the euro area have
pursued expansionary policies before elections. In an elec-
tion year – but not in the year prior to the election – the
budget deficit increases. This result is in line with third-
generation PBC models, which are based on moral hazard.
We also find a significant but small partisan effect on fiscal
policy outcomes.
191
European Union Politics
DOI: 10.1177/1465116506063706
Volume 7 (2): 191–211
Copyright© 2006
SAGE Publications
London, Thousand Oaks CA,
New Delhi
KEY WORDS
fiscal policy
political budget cycle
Stability and Growth Pact
It is often thought that incumbents try to use expansionary fiscal policy before
elections to increase their popularity. However, most empirical studies exam-
ining the existence of a political budget cycle (PBC)1in industrial countries
find little support for such election-driven fiscal policy manipulations.2Some
of these studies examine whether a PBC exists in member countries of the
European Union (EU). For example, Andrikopoulos et al. (2004) investigate
whether incumbent governments manipulated fiscal policy in order to
enhance their re-election prospects. Their empirical evidence for the 1970–98
period does not support this hypothesis. De Haan and Sturm (1994), who
examine fiscal policy in the European Community during the 1980s, also find
no support for PBCs. However, other studies focusing on the ‘old’ member
countries of the EU claim that in more recent years fiscal policy has often
turned expansionary before elections. For instance, Buti and Van den Noord
(2003) report electoral effects based on an examination of the discretionary
part of fiscal policy over the 1999–2002 period. Also Von Hagen (2003)
concludes that there is evidence for a PBC in EU member countries. For the
period 1998–2002 he finds that the (unweighted) average fiscal impulse in
pre-election years was significantly higher than the average fiscal impulse in
all other country-year cases.3
The results of these last two papers are somewhat surprising since
member countries of the EU are restricted in their fiscal policies by the
Stability and Growth Pact (SGP). The SGP consists of two Council Regu-
lations: one on the strengthening of the surveillance and coordination of
budgetary positions, and the other on speeding up and clarifying the imple-
mentation of the excessive deficit procedure. A corresponding European
Council Resolution ties them together. Regulation 1466/97 sets out to
strengthen multilateral surveillance and gives member states a goal of a
medium-term budgetary position of close to balance or in surplus. Regulation
1467/97 clarifies and accelerates the excessive deficit procedure as specified
in the Maastricht Treaty so that – in principle – within 10 months non-interest-
bearing deposits and ultimately fines can be imposed if the member state
concerned takes no effective actions to redress so-called excessive deficits
(measured against reference values of 3% of GDP for the general government
budget deficit and 60% for the general government debt-to-GDP ratio).4
According to Buti and Van den Noord (2003: 4), the SGP ‘is unquestionably
the most stringent supranational “commitment technology” ever adopted by
sovereign governments on a voluntary basis in the attempt to establish and
maintain sound public finances. The SGP, if applied according to its letter and
spirit, will have important implications for the behaviour of budgetary auth-
orities in both the short term (cyclical stabilization, policy co-ordination) and
long term (sustainability of public finances).’
European Union Politics 7(2)
192
To continue reading
Request your trial