Fiscal Policy of the Southern EU Countries Between 2000–2019 and Government Debts Resolution Prospects

Doctoral dissertation which I wrote as a part of my doctoral studies. The thesis is written in English and deals with the fiscal policy of the Southern EU countries. Furthermore, it analyses the instability and debt development in the Euro Area as a whole. It connects fiscal issues with the monetary policy of the European Central Bank.

Abstract

The aim of this work is to evaluate the fiscal policies of selected Southern European Union (EU) countries between 2000–2019, provide an overview of possible debt resolution options, and formulate economic policy recommendations. It examines arguably the most problematic countries in the Euro Area, which are Italy, Spain, Portugal, and Greece. In short, they are referred to as the EU4 countries. The work focuses on different fiscal perspectives, describes key mechanisms of debt transmission, identifies numerous implications, and connects the fiscal positions of the EU4 countries with other factors, namely with the structural flaws of the Euro Area and the common monetary policy of the European Central Bank. The presented work offers new theoretical and empirical insights within a complex and coherent analysis of the debt crisis in the Euro Area. The used methods include both qualitative and quantitative approaches. The latter include cluster analysis, estimation of structural budget balances and related indicators, debt dynamics framework, unobserved component models, error correction models, and Bayesian vector autoregressive models.

The work identifies five main systemic flaws of the Euro Area and present evidence that the EU4 countries suffer from a constant debt accumulation. In this regard, it describes eight channels which increase the indebtedness of the EU4 countries over time. Moreover, it analyses the effects of the common monetary policy and concludes that it worsens the situation in the medium- and long-term horizon. The theoretical analysis also shows that a fiscal union would not solve the systemic problems. The empirical part demonstrates that the EU4 countries should be concurrently analysed because they create a relatively stable cluster within the EU. The larger economies of Italy and Spain show slightly better fiscal positions; however, the situation is alarming nonetheless. The EU4 countries destabilised their economies through prohibitive structural budget deficits. The empirical analysis suggests that the effects of accession to the euro area were detrimental to the EU4 countries, especially to Greece. Moreover, the presented estimates also show a total inefficiency of the supranational fiscal regulation within the Euro Area. According to the analysis, the smaller countries (Greece and Portugal) were able to exploit the high degree of the socialisation of risks in the Euro Area. They played the role of the so-called black passenger in relation to their indebtedness to some extent. Nevertheless, in the end, they were forced to significantly improve their fiscal discipline as a result of the financial crisis of 2008–2009 when compared to the larger countries. The work also shows estimates of relevant fiscal multipliers, and on their basis, it is concluded that the borrowed fiscal resources were used extremely inefficiently before the financial crisis. The fiscal efficiency improved after 2014. However, it is a result of expansionary economic policies and adverse situation of the EU4 countries. After the recession, the relative indebtedness of the EU4 countries was further stabilised by positive real GDP growth. Nevertheless, I provide long-term debt projections and show that the fiscal situation of the EU4 countries is unsustainable. According to the projections, it cannot be expected that the EU4 countries to reduce their indebtedness to 60\% of their GDPs in at least 50 years if a debt restructuring or a major structural reform does not take place. Given the presented findings, the most appropriate solution to the debt crisis is a fiscal consolidation combined with structural reforms which must be based on supporting long-term economic growth. However, the structural reforms must necessarily include a return to country-specific currencies in the EU4 countries due to the systemic instabilities in the Euro Area. All in all, a return to basic market principles is needed.