The eurozone public finance and its effects on the economic growth amid the covid-19 pandemic

Resumen

This Ph.D. Thesis investigates about one of the most controversial issues of the Economic and Monetary Union of the European Union (EMU) public finance, searching the determinants of the current high national Public Debts accumulated since the Euro currency inception, that exceeded more than doubled the established in the Maastricht Treaty (1992). Analyzing especially the moral hazard behavior of private investors as one of the main causes that exacerbated the demand of government debt securities (issued sovereign bonds) by private banks, in the context of financial sector asymmetric information; especially, during the period of Sovereign Debt Crisis (2008-2012). Furthermore, it analyses the possible interactions of the public finance of national governments with the monetary policy developed independently and centralized by the European Central Bank (established on June, 1998). Finally, the effects of these economic policy issues on the global and percapita economic growth rates, proxy indicators of the economic wellbeing, are also studied. In this way, for better assessment of these public financial issues, the thesis splits logically in three chapters: (i) “Determinants of the Public Debt in the Eurozone and its Sustainability Amid the Covid-19 Pandemic”, (ii) “The Eurozone Moral Hazard: From the Sovereign Debt Crisis to the Covid-19 Pandemic”, and (iii) “Economic Policy and Growth in the Eurozone: Lessons for the post Covid-19 takes off”. The three chapters assesses dynamical and econometrically through System Generalized Method of Moments (SGMM), implemented to control for any potential endogeneity problems caused by the panel data structure. The data used comes from different sources such as the European Central Bank, Bank for International Settlements, World Bank (World Development and Worldwide Governance Indicators), European Commission, International Labor Organization, World Health Organization, Transparency International Agency, CountryRisk.io, among others. In the first chapter, the thesis considers four econometric regressions. Two estimated by the System GMM and the other two by instrumentalized GMM-Cluster regressions with the aim to get the factors that explain the determinants of the public debt-GDP ratios evolution. The results support a significant positive impact of the bond interest rate, unemployment rate, life expectancy at birth, voice and accountability, dummy of the sovereign debt crisis period, which explain the high public debt levels in EMU countries. Unexpectedly, an improving on corruption control and corruption perception index (a higher/better ranking) also seem to impact positively on the public debt ratios increase. On the other hand, the government effectiveness indicator, the primary balance surplus of the public sector and the economic growth affected negatively this studied public finance ratio (Debt). It is proved the public debt dynamic behavior, because its first lag was considered as explanatory variable, as well as other lagged variables as the public sector primary result. Furthermore, when different Worldwide Governance Indicators are tested, not all their coefficients resulted being significant, as firstly were expected, with the exception of the “government effectiveness”, which seem to reduce the public debt ratio. What shocking is the positive and significant impact of the high expectancy at birth. The study also includes other explanatory variables as unemployment rates and the permanent (structural) changes caused by the past Sovereign Debt Crisis (2008-2018), which resulted being positive and significant. The latter effect reflects that the past crisis has affected permanently the high public debt ratio, the fact that must be taken into account when facing the current Covid-19 pandemic crisis. After assessing the explicit factor of the huge public debts, the second chapter of the thesis is focused on one of the main factors that clearly explains the high indebtedness of the national governments and their ‘massive’ policies of issuing sovereign debt securities (public bonds) in international markets, which are demanded by private banks. This is the possible moral hazard behavior of some private investors (banks) who can take some advantages by over demanding risky sovereign bonds. In this way, the chapter analyzes the reaction of these private investors (banks) in response to the sovereign risk score and/or the premium risk. These indicators represent the possible default of the national governments over the private holders of public debt (bond holders). Therefore, this research emphasized the relevance of both riskiness indicators to explain the high indebtedness of EMU governments in the last two decades. Variables such as economic growth, the index of nominal residential property and the interest rate, are found to have a positive impact on the demand of government debt securities (sovereign bonds). The results are compatible with the economic theory, showing a boosting interaction between the economic growth, the real state sector and the interest rates; both last indicators showed a complementary rentability for private investors. On the other hand, when it is tested separately the impact of the sovereign risk score, for each GIIPS (Greece, Ireland, Italy, Portugal and Spain) countries, its impact has affected negative only for Greece, because of its dramatic situation since before sovereign debt crisis episode. It is also fair to point out that the stock of public debt has affected negatively and significantly the emission of new government debt securities (bonds). The third chapter of this thesis assesses the factors that can explain the global and percapita economic growth rates in this Economic and Monetary Union; especially, those linked with the public sector finance such as the Government Consumption Expenditure, Deficit Budget of the Public Sector and the Public Debt, which resulted having a negative and significant impact. Of course, the classical structural factors such as gross capital formation, human capital and commercial openness have impacted positively. Similarly, the nominal residential property price index is a driver of the economic growth rates (both in global and percapita terms), because European citizens used to invest on residential properties to maintain their life status for their old ages. Additionally, its relationship is positive with the global economic growth to such an extent that both parallelly were increasing, until bursting the real state bubble. Furthermore, this chapter studies the effects of GDP gap impact on the Deficit tendency for all EMU countries, after splitting the tendency and the cycle of the public sector Deficit and the Gross Domestic Product variables using the Hodrick-Prescott filter. The resulted coefficient sign of the GDP-cycle is negative and significant in average for all EMU countries, which means that when the GDP is above its tendency, the public sector Deficit is adjusted discretionary, adopting anticyclical fiscal policy; not only during the Sovereign Debt Crisis period (2008-2012), but also in the normal periods (NSDC). However, when separating EMU countries between GIIPS, Frugal (including Germany and France) and the other countries it is found that the first group (GIIPS) are using anticyclical fiscal policies, but the effect for the other countries (Frugal) is not clear. Finally, each chapter of the thesis develops some public and economic policies conclusions to obtain lessons and recommendations, with the aim to manage optimal the public finance to get sustainable development of the Eurozone economy and recovery in the post-Covid19 pandemic, that affected dramatically the real and financial sectors, and thus putting again the European Monetary Union to the test.