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Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal

  • Pedro Bação

    (GEMF and University of Coimbra, Faculty of Economics)

  • António Portugal Duarte

    (GEMF and University of Coimbra, Faculty of Economics)

The increase in both public and private indebtedness has been one of the main macroeconomic developments in recent years. This trend has been accompanied by large current account deficits, especially in smaller countries, such as Greece and Portugal. One possible explanation for this behaviour is the reduction in interest rates that convergence to the European single currency produced. At the same time as interest rates declined, these countries experienced a strong increase in domestic demand and a real exchange rate appreciation. Adoption of the euro implied that the appreciation of the real exchange rate could not be compensated by means of nominal devaluations, resulting in reduced competitiveness. In this paper we study the macroeconomic performance of Greece and Portugal during the process of convergence to the single currency and their prospects, in the light of the current financial crisis. To this end we make use of a consumption model developed by Gabriel Fagan and Vítor Gaspar. The experience of these two countries may give important lessons for candidate countries.

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This chapter was published in:
  • Mirjana Radovic Markovic & Srdjan Redzepagic & João Sousa Andrade & Paulino Teixeira (ed.), 2011. "Serbia and the European Union: Economic Lessons from the New Member States," Books, Institute of Economic Sciences, edition 1, volume 1, number srbeu.
  • This item is provided by Institute of Economic Sciences in its series Book Chapters with number srbeu-4.
    Handle: RePEc:ibg:chaptr:srbeu-4
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    1. Fernando Alexandre & Pedro Bação & João Cerejeira & Miguel Portela, 2009. "Employment and exchange rates: the role of openness and technology," NIPE Working Papers 16/2009, NIPE - Universidade do Minho.
    2. Alan Ahearne & Jean Pisani-Ferry, 2006. "The Euro: only for the agile," Policy Briefs 42, Bruegel.
    3. António Duarte, 2009. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," Transition Studies Review, Springer, vol. 16(1), pages 157-173, May.
    4. Gérard Oudiz & Jacques Mélitz & Daniel Cohen, 1988. "Le système monétaire européen et l'asymétrie franc-mark," Revue Économique, Programme National Persée, vol. 39(3), pages 667-678.
    5. Fagan, Gabriel & Gaspar, Vítor, 2007. "Adjusting to the euro," Working Paper Series 0716, European Central Bank.
    6. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
    7. Vítor Gaspar & Ildeberta Abreu, 1999. "Price Stability and Intermediate Targets for Monetary Policy," Working Papers w199901, Banco de Portugal, Economics and Research Department.
    8. Carlos Marinheiro, 2006. "The sustainability of Portuguese fiscal policy from a historical perspective," Empirica, Springer, vol. 33(2), pages 155-179, June.
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