Financial growth and Economic Growth in Europe : Is the Euro Beneficial for All Countries?

Iordanis Kalaitzoglou (1) , Beatrice Durgheu (2)

1 Audencia Business School
2 Coventry Business School

We revisit the financial-economic growth nexus, accounting for differential effects of large scale legislative frameworks, such as political and financial integration, in Europe. Debt is introduced as an integral component, and potential trifold endogeneity is investigated. Empirical findings show that neither political, nor financial integration, appear to have a direct impact on economic growth. In contrast, only monetary integration has a “dual” “indirect” impact on economic growth. First, the euro allows for improved access to financing, which enhances economic growth. This increases market values, which further accelerate economic growth. This is only evident within Eurozone, highlighting a “euro effect”, whereas political integration seems to be insufficient in engaging the countries in a synergetic endogeneity. Second, the improved access to financing induced by the euro introduces an additional macroeconomic risk of “over-borrowing”. This reverses the abovementioned spiral link by decreasing market values and therefore, lead the economies to spiral contraction. Consequently, the suitability of adopting euro should depend on the ability of each country to balance its dual role, under sustainable financing.

Mots clés: Economic Growth; Financial Growth; Government Borrowing; GMM

Domaines: Economies et finances; Applications [stat.AP]

Iordanis Kalaitzoglou, Beatrice Durgheu. Financial growth and Economic Growth in Europe : Is the Euro Beneficial for All Countries?. Journal of Economic Integration, 2016, 31 (2), pp.414-471. ⟨10.11130/jei.2016.31.2.414⟩. ⟨hal-00859252⟩