AUSTERITY POLICY AND ELECTION CYCLES: A PANEL DATA ANALYSIS OF ELEVEN NEW MEMBER STATES OF THE EUROPEAN UNION

Abstract

The implementation of economic policy is often limited by real social circumstances, and therefore can hardly be implemented as originally conceived theoretically. The role of political economy is to analyse deviations from optimal policies due to informational and political constraints on incumbents’ choices vis-à-vis economic policies. Elections represent the most important constraint in an incumbent’s political life, and as a consequence of that one tends to observe their opportunistic motivations during election periods. This is the exact time period when incumbents try to subordinate economic policy more towards the goal of achieving re-election compared to achieving set economic goals. This paper analyses this dichotomy (implementation of the austerity policy within the electoral cycle) in a sample of 11 new member states of the European Union (Bulgaria, Czech Republic, Estonia, Croatia, Hungary, Lithuania, Latvia, Poland, Slovak Republic, Slovenia and Romania) in the period from 2004 to 2019. The paper provides a brief overview of the austerity policy from the viewpoint of the two most dominant economic schools of thought: neoclassical and Keynesian. The theoretical part of the paper includes a basic overview of the public choice theory and the political budget cycles with a literature review of the existing research on the austerity policy and the political budget cycles. The empirical part of the paper is based on the dynamic panel data analysis (GMM and LSDV estimator). Empirical results confirm incumbents’ opportunistic behaviour during election years, but only in the years when countries were not under the Excessive Deficit Procedure. Once under the mechanism, the political budget cycle disappears. In other words, exogenously imposed rules trump incumbents’ endogenous motives.