Economic, Political and Institutional Determinants of Budget Deficits in the European Union
Using an extended data set of EU countries ranging from 1971-2006 and relevant econometric methods, we investigate the economic, political, and institutional determinants of government deficits in the EU. The results show a strong opportunistic behaviour of policymakers which leads to political business cycles. We find that political fragmentation does not play a significant role in government deficits. Partisan behaviour has a weak effect. The stability of the government has a significant negative impact on the size of the budget deficit. The paper also shows the significant effects of the Maastricht Treaty on fiscal consolidation.
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