Konstantinos Spanos

This article empirically explores the finance-growth relationship and the performance of the financial system measured by financial depth, accessibility, and efficiency of both financial sectors, that is, institutions and stock markets. It also examines the role of fiscal policy in conjunction with the performance of financial development during both normal and stress times. The data consists of a panel of 26 European Union countries over the period 1990–2020. The results show that during normal times, the finance-led growth relationship and the stock market are greatly important, while during stress times the relationship becomes insignificant. Interestingly, financial institutions are found to be more effective at promoting growth and there is clear evidence that a potentially dynamic positive effect of institutions to growth is absorbed by macroeconomic shocks. In addition, there is evidence for a threshold at a lower level compared to those previously identified in the literature. This latter finding can be attributed to different measures of financial institutions used and the impact of macroeconomic shocks. The inability of both financial sectors to enhance economic activity seems to exhibit persistence from the occurrence of the global financial crisis until the onset of the recent Covid-19 pandemic.

This paper investigates how the credit to private sector affects the impact of household debt on economic growth in 25 European Union countries over the period 1995-2018. The findings reveal that the positive effect of household debt on economic growth turns to negative with the onset of the 2008 global financial crisis (GFC) and beyond a certain point at around 58% of GDP, thus suggesting that their relationship is non-linear. Interestingly, the adverse effect subjects to the increased pressure of the credit to private sector when it is above 70%, and the pressure becomes even higher when the ratio is above 90%.

Purpose - The paper aims to explore the mechanisms linking the impact of financial development on economic growth and focuses on the long-term post-global financial crisis.

 Design/ Methodology/Approach - The study employs panel data for twenty-five European Union countries over the period 1995-2017. Principal Component Analysis is employed to produce two aggregate indices, namely financial banking sector development and stock market sector development. The empirical analysis is based on estimates through the autoregressive distributed lag (ARDL) method.

Findings - The results suggest that the outbreak of the crisis has led to a disruption of the positive finance-growth relationship, and the banking sector dominates in this adverse effect. The foreknowledge of the current study is that the linking mechanisms of the negative impact of financial development on economic growth, ten years after the global financial crisis, are household debt, private debt, and non-performing loans for the banking sector, while for the equity market this is the case through savings. Interestingly, the results reveal that unemployment increase excessively the borrowers’ debt level and then the non-performing loans. 

Research Implications - An implication is that the increase of credit supply and any monetary expansion along with lack of regulatory control and monitoring can lead banks to a higher risk exposure through household and private debt as well as non-performing loans. Besides, the higher levels of unemployment rates call attention for the trade-off between prudential regulation on the supply of loans and economic activity, since higher unemployment affect the non-performing loans and, as a consequence discourage the demand, increase precautionary savings, and cancel or postpone investment decisions, thus, affecting the equity market.

Originality/Value – The paper provides useful insights to economists and policymakers who are interested in understanding the weakness of banking and stock market sectors to promote economic growth for a long time after the global financial crisis.

This paper aims to examine the relationship between financial development and economic growth on the face of the recent financial crisis, using a panel dataset of 26 European Union countries over the period 1990-2016. The empirical approach uses multiplicative dummies to compare two distinct sub-periods before/after the crisis. The results show that before crisis, financial development promoted economic growth, while after the crisis it hindered economic activity. Also, the findings suggest that during the years 2008 and 2009 the capital adequacy of banks protected depositors and promoted the stability of the financial system.