Democratic Risk, the Great Recession, and the Euro Crisis

This paper estimates the impact of elections on government bond interest rates.  We calculate the scale and nature of event-country and spillover electoral impacts in ten euro zone countries and a group of four placebo countries.  Our analysis produces three conclusions.  First, democratic risk is not limited to the euro zone.  The great recession has brought about a return to historical levels of democratic risk outside Europe too.  The euro zone is different because democratic risk is so difficult to manage in a single currency.  Second, spillover is often asymmetrically distributed.  Therefore, it can be an obstacle to, rather than an incentive for, international co-operation.  Third, within the euro zone, the domestic impact of elections is greatest in vulnerable countries but the greatest range of spillovers is associated with elections in strong countries. These conclusions have implications for the EU’s debt crisis management policy.