The Political-Budget Cycle in Countries of the European Union

We empirically estimate the political-budget cycle in the member countries of the European Union in period of 1988-2008. We indirectly analyze the potential of these countries to deal with increasing public debts which were augmented by the global economic crisis. The selection of the EU countries depends on three characteristics of democracy - shared power, openness and adaptability. The openness of democracy is the most important characteristics in relation to effective behavior of governments. We suppose that governments are motivated to make electoral manipulation in countries which have lower level of openness. We choose Finland, the Netherlands, Austria, Estonia, Poland, the Czech Republic, Romania and Greece to include into our sample of countries. The research of political-budget cycle confirmed our assumption. We did not find the political-budget cycle in Finland, the Netherlands and Estonia. On the other hand, we identified that Austrian, Czech and Greece governments had a tendency to manipulate fiscal policy before elections. The regression coefficients of Poland electoral dummies were very statistically significant but they had a wrong sign. We could not estimate political-budget cycle in Romania due to the short time series.