Are there political budget cycles in the euro area?

This article examines whether there is a political budget cycle (PBC) in countries in the euro area. Using a multivariate model for 1999-2004 and various election indicators we find strong evidence that, since the start of the Stability and Growth Pact, fiscal policy-makers in the euro area have pursued expansionary policies before elections. In an election year - but not in the year prior to the election - the budget deficit increases. This result is in line with third-generation PBC models, which are based on moral hazard. We also find a significant but small partisan effect on fiscal policy outcomes.