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The causes of excessive deficits in the European Union

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Castro, Vítor Manuel Alves (2007) The causes of excessive deficits in the European Union. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.805).

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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.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HJ Public Finance

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Debts, Public -- European Union countries, Fiscal policy -- European Union countries, Transformations (Mathematics), European Union countries -- Politics and government, European Union countries -- Economic conditions

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

July 2007

Dates:

Date	Event
July 2007	Published

Number:

No.805

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

Funder:

Fundação para a Ciência e a Tecnologia (FCT)

Grant number:

SFRH/BD/21500/2005 (FCT)

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