Opa! Did EU Entry Contribute to the Greek Crisis?

Alexi Thompson,Koichi Yamaura

doi:10.4236/me.2013.410071

Abstract

This paper focuses on possible underlying causes of the current Greek debt. The Gregory and Hansen residual-based cointegration test is to test Greek deficit sustainability with annual data from 1988 to 2012. This cointegration test identifies structural breaks when they are unknown a priori. Estimated results reveal a break in 1996. The break in 1996 coincides with the election of Simitis as prime minister, suggesting that the current debt problem may be due to increased government expenditure associated with the tenure of Simitis rather than due to EU entry.

Highlights

Despite the passage of harsh austerity measures by the Greek Parliament to obtain financial bailouts from the European Union (EU), the future of Greece is uncertain
The break in 1996 coincides with the election of Simitis as prime minister, suggesting that the current debt problem may be due to increased government expenditure associated with the tenure of Simitis rather than due to EU entry
Following [5], the Gregory and Hansen residual-based cointegration test (GH test) is used to further investigate Greek debt sustainability over this time period. This cointegration test has the advantage over other cointegration tests in that it tests for significant breaks in the data when they may not be known a priori

Summary

Introduction

Despite the passage of harsh austerity measures by the Greek Parliament to obtain financial bailouts from the European Union (EU), the future of Greece is uncertain. Many European leaders and economists support a Greek bailout, worrying about a run on European banks. They fear that larger economies such as Spain, Italy, Portugal, and Ireland may follow in Greece’s footsteps and default. Some economists and many rioting Greeks favor default and return to the drachma These economists fear that the EU bailouts are only delaying the inevitable. The government-debt crisis began in 2010 under Prime Minister Pandreou’s term Besides these increases in government spending, recent papers have discussed the possibility of EU entry contributing to the failure of the Greek bond market [4]. Germany’s reluctance to financially support Greece in 2008 may have only worsened the crisis as investors tried to simultaneously unload their Greek bonds. Assuming the Greek deficit is not sustainable, a break in 2001 would be evidence that the current crisis is in part due to EU entry

Theory

Estimation and Results

Conclusions