Convergence and public debt in the European Union: An overlooked trade-off?

ABSTRACT The paper brings together two distinct strands of literature that discuss the process of convergence in the EU and the impact of public debt on growth. It makes a contribution to both literatures, by challenging the standard approach that relates public debt to growth, on two grounds. First, it shows that the process of convergence that took place among EU countries prior to the crisis was driven primarily by public policies that, however, increased public debt. Second, it provides evidence that the component of public debt that is related to infrastructure development, public goods provision and caching-up with the more advanced countries has a positive impact on growth and convergence. The findings of the paper call for a re-examination of the role of public policies in the processes of economic integration and development, leaving some room for a debt-led growth strategy.