A tale of housing cycles and fiscal policy, not competitiveness. Growth drivers in southern Europe

By Engelbert Stockhammer, Andre Novas Otero

PKES Working Paper 2224

October 2022

Southern European countries are widely considered a distinct type of capitalism, but they have experienced a varied growth performance, both over time and across countries. This paper investigates the growth drivers in southern Europe since the mid-1990s. We consider a broad set of potential growth drivers derived from the literature on Mediterranean capitalism and Comparative Political Economy more broadly. On the demand side these include the role of house prices (as the main financial variable; highlighted in parts of the growth models approach); the ‘financial curse’ hypothesis (which posits that financial inflows caused house price booms and crowded out manufacturing activities); and Keynesian arguments on the impact of fiscal policy. On the supply side, these encompass the cost competitiveness argument (consistent with mainstream economics and the Varieties of Capitalism approach), research-led technological change; and neo-structuralist arguments regarding the productive capacity. We find strong evidence for the growth contributions of house prices and fiscal policy. While these findings are generally supportive of extant analysis of these economies as finance-led rather than export-led, they call for a more serious integration of house prices in growth model analysis and for a more systematic analysis of the growth impact of fiscal policy.

Keywords: Comparative Political Economy, growth models, growth drivers, southern Europe, house price cycles, fiscal policy

JEL classification: B20 B50 E12 O43 P51