FISCAL POLICY, GROWTH AND COMPETITIVENESS IN EMU: EVIDENCE FROM PORTUGAL AND GREECE

Marios Psychalis,Nagia Grigorakou,George Stivachtis,Petros Dimitrakopoulos,Panagiotis Gournas

doi:10.32479/ijefi.9889

Abstract

This paper aims at examining whether reforms in EU economic and fiscal governance between the period starting from 2010 and ending on 2018 have increased the Gross Domestic Product growth rate in Greece and Portugal. Reforms occurred, such as “Six Pack”, “Two Pack”, the “Fiscal Compact”, and the “Euro Plus Pact”, have focused on fiscal consolidation and competitiveness improvement; in other words, during the aforementioned time period, EMU concentrated on the improvement of internal as well as external imbalances. Moreover, the present paper assesses the international competitiveness through the prism of two main indicators: Unit Labour Cost and Current Account Balance. It seems that the literature is not crystal clear on the relationship between debt and the fiscal policy on the one side, competitiveness and growth from the other side. The findings of the paper may be of great assistance to policy makers on growth, competitiveness and fiscal policy, as they highlight the relationship between economic stability, entrepreneurship and growth. The herein below presented results demonstrate that there is, indeed, a strong relationship between fiscal consolidation and growth, while the relationship between public debt, Unit Labour Cost, Current Account Balance and growth remains blurred.Keywords: Fiscal reforms, Entrepreneurship, Competitiveness, Economic Policy in EMUJEL Classifications: H30, H60, F15DOI: https://doi.org/10.32479/ijefi.9889

Highlights

A question arising when examining in depth the terms “fiscal policy” and “growth” is which is the nature of their relationship; many theorists have grasped the opportunity to commence discussions and participate in debates while trying to determine the connection between those economic terms
Many economists underline the improvement of the balance of current payments has positive results in the external competitiveness of an economy and subsequently such competiveness increases growth rate (Thirlwall, 1979)
All reforms occurred were focused on the improvement of the fiscal result and the stabilization of public debt’s level aiming at fiscal balance

Summary

Introduction

A question arising when examining in depth the terms “fiscal policy” and “growth” is which is the nature of their relationship; many theorists have grasped the opportunity to commence discussions and participate in debates while trying to determine the connection between those economic terms. Theorists’ community has been engaged with the identification of the relationship between “public debt” and “growth.” For various theorists the increase of public debt results in deceleration of the growth rate. The existence of a high public debt lowers the increase rate of GDP, since the process for the capital increase slows down (Woo and Kumar, Public Debt and Growth, 2015). Such GDP rate deceleration has as a consequence the realization of small investments that subsequently lead in negative effects on per capita income (Balassone et al, 2013). The existence of a BCP deficit reduces an economy’s external competitiveness and leads in the reduction of growth rate (Thirlwall and Hussain, 1982)

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