The political economy of the German Länder deficits: weak governments meet strong finance ministers

Abstract

We analyze the deficits of the German Länder (regional states) for the period from 1960 to 2005 and test a number of hypotheses derived from the literature on the political economy of public deficits. We find evidence for the weak government hypothesis, that is, coalition governments issue significantly more debt than single party governments – a result that is typically explained by the common pool problem. As our data suggest, this result crucially hinges on the position or strength of the finance minister within coalition governments. We find that coalition governments with a strong finance minister are – in terms of borrowing – not significantly different from single party governments.. In addition we find (weak) evidence for an opportunistic political business cycle. As borrowing is significantly lower in pre-election years it appears that German voters favor fiscal discipline. There is no evidence for partisan behavior; so, party ideology seems to play a negligible role.