The Finance Growth Nexus, Institutions Matter: Evidence from The A10 Countries of The Eu

The biggest single expansion of the European Union (EU), in terms of population and territory, occurred in 2004 when ten new members, often called the A10, joined the fifteen existing members. The first decade of the 21st century also saw unprecedented levels of growth in these countries, a ‘Golden Age’ of economic growth – which many have partly attributed to the accession process and concomitant institutional change, and partly due to the free trade strategies
pursued within the largest single market in the world. This paper looks at the financial aspect of this burgeoning real economic expansion and investigates the role of financial development in economic growth. Using a panel model with
data covering periods from 1997–2020, and allowing for spatial correlation, we distinguish between indicators of financial institutions and financial markets. Within each subcategory, we check for the impact effect of financial depth, access, and efficiency – the three major criteria for economic growth. We find that financial development pertaining to financial institutions is of significant importance, while financial markets have relatively lower effects. This implies
that the institutional and regulatory structure, as provided by the accession to the EU, may have played the most crucial role in stimulating economic growth. The ‘Golden Age’, we contend, was catalyzed by financial development broadly, and financial deepening, in particular. However, it was predominantly spurred by the growth of financial institutions arguably facilitated by the accession to the EU.