Persistent current account (CA) deficits have been a common problem for developed countries during the floating exchange rates period after the end of the Bretton Woods system. This has also been the case for some of the EU-15 countries with the problem being more serious for those in the South. Excessive private and to a certain extent, government spending has been cited as a major cause of these deficits. Lack of fiscal discipline and euphoria from the prospect of the euro-zone participation as well as historically low interest rates resulted in excessive consumer spending. Furthermore, nominal wage adjustments, in excess of productivity growth, have resulted in significant deviations in ULC growth rates between EU-15 countries.
The problem has been more serious in Greece, Spain and Portugal. Even though inflations divergences from the EU average were not so large for these countries, they were persistent, resulting in continuous losses in competitiveness and real exchange rate appreciation and ever increasing trade and current account deficits. These deficits resulted in external debt accumulation for Greece, which led to the recent Greek debt crisis. The EU funding that aimed at improving the infrastructure and production structure of Greece did not seem to achieve its purpose.
The purpose of this paper is to investigate what were the reasons for Greece’s deterioration of competitiveness and the role of EU policy on Greece’s debt crisis.