The Euro zone peripheral countries’ sovereign debt crisis: Also a case of non-mature democracies?

Abel Fernandes,Paulo Mota

doi:10.2298/pan1303291f

Abstract

The euro zone peripheral countries face a profound sovereign debt crisis threatening the very existence of the euro as we know it. Therefore, the study of the various factors contributing to this crisis is of the utmost importance. Given the set of the twelve initial member States, the euro zone peripheral countries (Portugal, Greece, and Spain) have in common the fact that they are recent democracies. Independently from other valid approaches to this question, the specific contribution of this paper is to focus on the role played by institutional and political variables in the behavior of fiscal variables. We show that the behavior of these variables is indeed statistically different from the one observed for the other euro zone countries, which are mature democracies. These outcomes are also in line with what that literature expects from the relationship between non-mature democracies and the incidence of election year budget cycles.

Highlights

The Budget as a Political ProcessThe expected outcomes are higher expenditures, lower revenues, and higher fiscal deficits owing to the government’s failure to oppose competing groups pressing for budgetary benefits
The behavior of the institutional and, most especially, political variables is statistically different from the one exhibited by the other countries
Government ideology has the typical influence expected by the literature along the spectrum from right to left

Summary

The Budget as a Political Process

The expected outcomes are higher expenditures, lower revenues, and higher fiscal deficits owing to the government’s failure to oppose competing groups pressing for budgetary benefits. Under this perspective, the budget becomes a common good with asymmetrically distributed benefits and costs among community members. Woo assumes that higher Gini coefficients lead to higher deficits on the assumption of underlying incentives to undertake populist policies for income redistribution The sign he expects for that estimated coefficient is debatable because high social polarization means low-income redistribution, lower taxation and social transfers than would be required to achieve a more balanced income distribution

Model and Data Set

The Estimated Results

Conclusions