Paul-Adrien Hyppolite, Graduate student in Economics at the École normale supérieure (Paris) and visiting scholar in the Department of Economics at Harvard University
Drawing on a new dataset, I explore the dynamics of national wealth accumulation in Greece since 1997, and suggest a thought-provoking narrative on the causes of the Greek depression. I show that about two-thirds of the increase in external public debt during the pre-crisis period inside the euro area can be attributed to factors other than fiscal indiscipline. A positive wealth effect tied to the housing bubble resulted in a low level of national saving, thereby pushing the government to borrow from abroad to roll over its debt issued domestically and to finance investment in capital goods. Compared to Spain and Ireland, two explanations may account for the rise in external public – instead of corporate – debt during the pre-crisis period: (i) the smaller size of firms that were relatively more credit-constrained and thus had limited access to external financing, and (ii) the larger initial size of the government balance sheet – in terms of both assets and liabilities – that generated a greater incentive to roll over existing domestic debt and invest in physical assets through external borrowings.