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

Pedro Bação and António Portugal Duarte

No 2011-04, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: 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.

Keywords: consumption; euro; interest rates; indebtedness; exchange rates (search for similar items in EconPapers)
JEL-codes: E21 F32 F36 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2011-01
New Economics Papers: this item is included in nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Chapter: Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal (2011)
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