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The Causes of Excessive Deficits in The European Union

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  • Castro, Vítor

    (University of Warwick, University of Coimbra and NIPE)

Abstract

Several 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.

Suggested Citation

  • 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.
  • Handle: RePEc:wrk:warwec:805
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    Cited by:

    1. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2012. "Are there change-points in the likelihood of a fiscal consolidation ending?," NIPE Working Papers 18/2012, NIPE - Universidade do Minho.
    2. Eugenia-Ramona Mara, 2012. "Determinants of fiscal budget volatility in old versus new EU member states," Working Papers Department of Economics 2012/31, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    3. Mihai Carp & Andreea Vasiliu, 2010. "The Implications Of Gross Fixed Capital And Unemployment Rate General Government Deficit. Empirical Study At The European Level," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 2(4), pages 61-72, December.
    4. Luca Agnello & Ricardo M. Sousa, 2014. "How Does Fiscal Consolidation Impact on Income Inequality?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 702-726, December.
    5. Gnangnon, Sèna Kimm, 2013. "Structural vulnerability and excessive public indebtedness in CFA Franc Zone countries," Economic Modelling, Elsevier, vol. 35(C), pages 816-832.

    More about this item

    Keywords

    Excessive public deficits ; European Union ; Political opportunism ; Binary choice models;

    JEL classification:

    • 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, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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