This paper argues that the highly celebrated EU process of convergence with respect to development levels has been driven by the accumulated debt of the European Periphery. Using panel data for the pre-crisis period and a 2-stages econometric approach that decomposes public debt to a ‘targeted’ and a ‘non-targeted’ part, the paper provides evidence that challenges the mainstream growth paradigms. First, when the effect of a debt-led fiscal expansion is included in the standard convergence model, the market based process of integration appears to be strongly associated with increasing inequalities among EU member states, casting some doubt to the ability of the current EU model to generate inclusive growth and convergence. Second, the model provides evidence that ‘targeted’ public debt related to public investment and public services contributes to growth and convergence in the EU, while ‘non-targeted’ public debt related to clientele practices is related to divergence. The results of the paper reveal the limits of the current model integration in the EU and raise serious questions about the effectiveness of the debt-management and austerity policies that have been implemented during the crisis
Petrakos G., Kallioras D., and Artelaris P., (2015) 'Debt-led convergence in the European Union', Discussion Paper Series, DPRD - U.Th., 21(1): 1-18.