Fiscal Discretion and Elections in the Early Years of Emu

20 Pages Posted: 4 Nov 2004

See all articles by Marco Buti

Marco Buti

European Commission, DG II

Paul van den Noord

Organization for Economic Co-Operation and Development (OECD)

Abstract

An early criticism of the Stability and Growth Pact (SGP) has pointed to its asymmetric nature and the weak mechanisms to prevent politically-motivated fiscal policies: its constraints would bite in downswings but not in upswings, especially if, in the latter, the electoral cycle increases the temptation to run expansionary policies. We find that the experience of the initial years of EMU lends support to this criticism. Overall, unlike the experience in the run-up to EMU, fiscal policies had an expansionary bias, and a "genuine" discretionary boost took place in correspondence to political elections. Both sign and composition of such discretionary changes are in line with the predictions of the recent literature on electoral budget cycles. Closer fiscal surveillance may help detect such behaviour early on, but it is unlikely to curb the incentives to run politically-motivated fiscal policies when elections approach.

Suggested Citation

Buti, Marco and van den Noord, Paul, Fiscal Discretion and Elections in the Early Years of Emu. Available at SSRN: https://ssrn.com/abstract=608495

Marco Buti (Contact Author)

European Commission, DG II ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium
+32 2 296 2246 (Phone)
+32 2 299 3505 (Fax)

Paul Van den Noord

Organization for Economic Co-Operation and Development (OECD) ( email )

Economics Department (ECO)
2 rue Andre Pascal
75775 Paris Cedex 16
France

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