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GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 04 de 2011

   

Accession to the European Union, Interest Rates and Indebtedness:

Greece and Portugal


Pedro Bação
Faculdade de Economia, Universidade de Coimbra e GEMF

António Portugal Duarte
Faculdade de Economia, Universidade de Coimbra e GEMF

Abstract:
The increase in both public and private indebtedness has been one of the main macroeconomic developments in recent years. This trend has been accompanied by large current account deficits, especially in smaller countries, such as Greece and Portugal. One possible explanation for this behaviour is the reduction in interest rates that convergence to the European single currency produced. At the same time as interest rates declined, these countries experienced a strong increase in domestic demand and a real exchange rate appreciation. Adoption of the euro implied that the appreciation of the real exchange rate could not be compensated by means of nominal devaluations, resulting in reduced competitiveness. In this paper we study the macroeconomic performance of Greece and Portugal during the process of convergence to the single currency and their prospects, in the light of the current financial crisis. To this end we make use of a consumption model developed by Gabriel Fagan and Vítor Gaspar. The experience of these two countries may give important lessons for candidate countries.

JEL Classification: F36, E21, F32.

Keywords:
Consumption, euro, interest rates, indebtedness, exchange rates.

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