The Greek debt crisis- using the Solow model to simulate future fiscal balance and output growth

Sammanfattning: Since the financial crisis of 2008 many European countries have been plagued by growing fiscal deficits and public debts. The country found by many to be the worst off is Greece and in this study we use the Solow model of economic growth to attempt to find a savings level for Greece which provides enough capital for both investment and debt service. We use two different scenarios where one is based on economic forecasts concerning fiscal balance and public debt by Greece and the EU and one where we let Greece adopt the fiscal policies of Switzerland. Through OLS estimation we find how certain variables such as public expenditure affect the savings level. By using the Solver software in Microsoft Excel we optimize the public finance levels according to our two scenarios and see how this affects the savings level which in turn influences investment and economic growth. The results of our study are somewhat grim from a Greek perspective. In both scenarios Greece has to reach large budget surpluses unheard of historically for the country to cut their public debt level. We also find that the country cannot attain both economic growth and a sustainable debt level simultaneously.