Insolvency dynamics of the Greek private sector during the era of austerity: an empirical assessment

This paper examines empirically the impact of austerity on the financial balance of the Greek private sector, with the use of the Dynamic OLS (DOLS) methodology. The standard stock-flow consistent private expenditure function is extended by treating corporate profits separately from the disposable income of the private sector in order to take into account the impact of austerity on distribution and private spending. The empirical findings indicate that the economy is debt-led, with austerity generating insolvency dynamics for the private sector. On one hand, at least since the introduction of the euro currency, private expenditure was heavily relying on the disposable income net of profits in an unsustainable manner, while on the other, the implementation of the Economic Adjustment Programs (EAPs) have intensified these unsustainable conditions, degrading the growth prospects of the economy.