The Causes of Excessive Deficits in the European Union
AbstractSeveral studies have identified the factors that cause public deficits in industrial democracies. They consider that economic, political and institutional factors play an important role in the understanding of those deficits. However, the study of the determinants of excessive deficits remains practically unexplored. Since excessive deficits can have large negative spillover effects when countries are forming a monetary union without a centralised budget – as it is the case for a group of European countries – this paper tries to explore that gap in the literature by identifying the main causes of excessive deficits and the ways of avoiding them. Binary choice models are estimated over a panel of 15 European Union countries for the period 1970-2006, where an excessive deficit is defined as a deficit higher than 3% of GDP. Results show that a weak fiscal stance, low economic growth, the timing of parliamentary elections and majority left-wing governments are the main causes of excessive deficits in the EU countries. Moreover, the institutional constraints imposed after Maastricht over the EU countries’ fiscal policy have succeeded in reducing the probability of excessive deficits in Europe, especially in small countries. Therefore, this study concludes that supranational fiscal constraints, national efforts to reduce public debts, growth promoting policies and mechanisms to avoid political opportunism and partisan effects are essential factors for an EU country to avoid excessive deficits. Finally, the results presented in this paper raise the idea that a good strategy for the EU countries to avoid excessive deficits caused by the opportunistic behaviour of their policymakers would be to schedule elections for the beginning or the end of the year.
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Bibliographic InfoPaper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 13/2007.
Date of creation: 2007
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Other versions of this item:
- Castro, Vítor, 2007. "The Causes of Excessive Deficits in The European Union," The Warwick Economics Research Paper Series (TWERPS) 805, University of Warwick, Department of Economics.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H6 - Public Economics - - National Budget, Deficit, and Debt
- O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-06 (All new papers)
- NEP-CBA-2007-10-06 (Central Banking)
- NEP-EEC-2007-10-06 (European Economics)
- NEP-MAC-2007-10-06 (Macroeconomics)
- NEP-PBE-2007-10-06 (Public Economics)
- NEP-POL-2007-10-06 (Positive Political Economics)
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- Luca Agnello & Vitor Castro & Ricardo M. Sousa, 2013.
"Are There Change-Points in the Likelihood of a Fiscal Consolidation Ending?,"
GEMF Working Papers
2013-06, GEMF - Faculdade de Economia, Universidade de Coimbra.
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Working Papers Department of Economics
2012/31, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Mara, Eugenia-Ramona, 2012. "Determinants of fiscal budget volatility in old versus new EU member states," MPRA Paper 42555, University Library of Munich, Germany.
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