Determinants of economic growth revisited: is competitiveness and investment the solution for Greece?

In this paper we investigate the role of debt as an additional determinant of growth complementing the relevant empirical growth literature using insights gained during the recent economic crisis. Our focus is the case of Greece, the country more severely affected by the crisis, thus having to resort to tripartite external assistance. More specifically, we are exploring whether the pillars of the Troika Adjustment Programme for Greece could actually be the key to overcome the current deadlock the Greek economy, as the required fiscal consolidation resulted in deep and prolonged recession which in turn jeopardizes the sustainability of the improvement in general government accounts. The Troika Programme for Greece featured specific structural reforms as a prerequisite to improve the business environment and enhance the outward orientation of the Greek economy, thus identifying investment (domestic and foreign) and international competiveness as the new growth drivers of the Greek economy. Using panel data for EU countries we are investigating the validity of the proposed economic policy mix, placing special emphasis on the role that indebtedness (both private and public) has played in the past and could also play in the future (as public debt is ruled out for financing investment but credit expansion to the private sector through increased liquidity is a sine qua non condition for the recovery of investment). The innovation of this study is that it takes stock of both structural reforms (through PMI) and indebtedness and estimates their relevant impact on growth.