Economic growth in Eastern, Central and Southern European countries. An econometric analysis of the components of their public spending

Since the entry into force of the Stability and Growth Pact, European countries with “weak fiscal policy fundamentals” have been forced to introduce fiscal measures for controlling public spending to achieve and maintain the objectives required by the Maastricht Treaty. The financial crisis of 2008 and 2009 caused a strong reduction in GDP and investments, and an increase in social disparities. Consequently, the gap between European Southern countries (as well as Central Eastern countries) and the rest of the European Union became wider in several ways. The need of financial resources for multi-annual reforms and investments makes it crucial for these governments to reflect on the relevance of public spending in terms of the economic effects of redistributive politics of pure transfers to households versus dynamic adjustments of public capital accumulated in the recipient economy. The present paper aims at empirically verifying the economic effect of two public spending components such as social transfers and public gross fixed capital formation, in Eastern, Central and Southern European countries, in a compliance context with public spending control. The econometric analysis is based on a dynamic panel regression. The main finding is that public gross fixed capital formation and, to a lower extent, social benefits other than transfers in-kind have significant effects on economic growth (positive and negative, respectively).