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Greek Sovereign Debt Crisis: Causes, Fiscal Adjustment Programs and Lessons for Croatia

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  • Mislav Brkic

    (Croatian National Bank, Croatia)

Abstract

This paper investigates the factors that have led to the Greek sovereign debt crisis in order to derive policy lessons for Croatia and other highly indebted countries. In the first years after euro adoption, it seemed that membership in the monetary union facilitated a catching-up process for Greece, given that it enjoyed high growth rates and a rapid convergence of per capita income. However, the global crisis has revealed that the previous economic expansion was an unsustainable process based on excessive inflow of debt-creating foreign capital. In this paper, it is argued that the government sector contributed the most to the rising vulnerability of the Greek economy. Data are presented showing that extensive government borrowing was the main factor behind the rapid accumulation of Greece's external debt, which made it highly vulnerable to external shocks. Besides the procyclical fiscal policy, some other factors also contributed to the overheating of economic activity in Greece. Hence, this paper reviews the literature that deals with the compression of peripheral countries' sovereign bond yields after the creation of the monetary union, the doubtful suitability of the ECB's expansionary policy stance from the perspective of then booming peripheral states, and the institutional shortcomings of the EMU. The main motivation of this paper is to identify the key roots of the Greek debt crisis in order to derive lessons for policy-makers in Croatia. Since the beginning of the recession in 2008, Croatia has seen a significant deterioration in fiscal fundamentals, with high public debt becoming the main source of macroeconomic vulnerability. Reducing the debt-to-GDP ratio has emerged as a key policy challenge that needs to be addressed in order to reduce the likelihood of a debt crisis.

Suggested Citation

  • Mislav Brkic, 2016. "Greek Sovereign Debt Crisis: Causes, Fiscal Adjustment Programs and Lessons for Croatia," Croatian Economic Survey, The Institute of Economics, Zagreb, vol. 18(1), pages 71-99, June.
  • Handle: RePEc:iez:survey:ces-v18_1-2016_brkic
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    More about this item

    Keywords

    Greece; sovereign debt crisis; public debt; Croatia; monetary union;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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