The Destabilizing Effects of Political Budget Cycles: The Case of Greece

During the Third Hellenic Republic (Metapolitefsi), that is over the last four decades, Greece has been characterized by severe political fiscal cycles. Regardless of how we measure political fiscal cycles, via the actual budget balance as percent of GDP or via the primary budget balance as percent of GDP, we consistently observe that, in the years of general (parliamentary) elections, the budget deficit jumps to rates unprecedented for a developed economy. This phenomenon has contributed significantly to the recent Greek public debt crisis. In this paper, we have two main objectives. Firstly, we aim to confirm the emergence of political fiscal cycles in Greece during the period known as the Third Hellenic Republic (Metapolitefsi) beginning at 1974. Secondly, we investigate whether general elections affect not only public finances, but also the total output of the economy and try to characterize this effect as stabilizing or destabilizing. Two are the main findings of our analysis: the Greek economy is indeed characterized by very sharp political fiscal cycles during the period of the Third Hellenic Republic and that these cycles have a destabilizing effect on the total output of the economy.