In the literature on politics and macroeconomics, the issue of
political business cycles has been widely studied. Research has
identified two different types of cycles. One school postulates that
governments generate `opportunistic' cycles in order to be re-elected.
The other assumes that parties voted into power produce `partisan'
cycles in order to pursue their ideologies. Opportunistic cycles are
related to elections, while partisan cycles are connected to changes in
government. In Discussion paper No 1290, Research Fellow Andre Sapir
and Khalid Sekkat present ideas that lay at the intersection
between the literature on macroeconomics and politics and the literature
on coordination. It uses models of political business cycles in an open
economy setting to investigate the costs and benefits of forming
electoral areas, i.e. regions where countries share the same electoral
calendar. Both opportunistic and partisan models are considered. The
main finding of the paper is that the desirability of an electoral area
between two countries is enhanced when the spillovers between these
countries are large and positive, and when they face symmetric shocks.
Hence, if a group of countries constitutes an optimum currency area it
is also likely to be an optimum electoral area.
The paper sheds light on the situation in the European Union (EU), a
collection of fifteen highly interdependent states, each with its own
electoral calendar. In the context of `political macroeconomics' with
fifteen economically interdependent, but politically independent,
states, the coordination problem discussed earlier can be solved in two
ways. One solution would consist of preventing governments from
manipulating economic policies, for instance by making central banks
independent and/or by limiting public deficits as envisaged in the
Economic and Monetary Union (EMU) chapter of the Maastricht Treaty.
Another solution would be to adopt a single election day throughout the
EU, like in the United States. The analysis can also be instructive in
the context of the North American Free Trade Area (NAFTA), where
coordination problems also arise due to increasing interdependence.