In the second decade of the Economic and Monetary Union, the convergence process between the less and the more developed members of the Euro Area weakened significantly, as disparities in the growth slowdown after the global financial crisis caused asymmetric losses in per capita income. The most pronounced divergence took place between Greece and its Euro Area peers as prolonged austerity measures imposed in exchange of a debt bailout led to a serial collapsing of growth. At the same time, Greece had suffered from a dramatic deterioration of institutions, ranging from serious blows in Government effectiveness and political stability to market distortions and a serious weakening of the rule of law. To assess the impact of such effects on convergence, an empirical growth model with the relevant World Bank indicators as explanatory variables is estimated. Considering the other Euro Area economies as control countries, the model is then used to calculate the cost of crumbling institutions in Greece in terms of per capita GDP foregone. The estimate is so significant that Greece – alongside with macroeconomic stabilization – should urgently focus on improving institutions, if a convergence process toward the more developed nations of the Euro Area is to set off again.
This paper was presented to the Tufts/LSE Conference on Greece and the Euro: From Crisis to Recovery on April 12, 2019.
Nicos Christodoulakis, Greece and the Euro Area: The Cost of Weak Institutions, CGK Working Paper no. 2019-05 (May 2019).