Financial supervision to fight fiscal dominance? The gold standard in Greece and South-East Europe between economic and political objectives and fiscal reality, 1841-1939

Matthias Morys

Abstract

We add a historical and regional dimension to the debate on the Greek debt crisis. Analysing Greece, Romania, Serbia/Yugoslavia and Bulgaria from political independence to WW II, we find surprising parallels to the present: repeated cycles of entry to and exit from monetary unions, government debt build-up and default, and financial supervision by West European countries. Gold standard membership was more short-lived than in any other part of Europe due to fiscal dominance. Granger causality tests and money growth accounting show that the prevailing pattern of fiscal dominance was only broken under international financial control, when strict conditionality scaled back the treasury’s influence; only then were central banks able to conduct a rule-bound monetary policy and stabilize their exchange-rates. The longrun record of Greece suggests that the perennial economic and political objective of monetary union membership can only be achieved if both monetary and fiscal policy is effectively delegated abroad.