Sustainability of Public Social Spending: Asymmetric Effects and Financialization

We investigate the sustainability of the asymmetric public social spending (PSS)–financialization relationship in the Eurozone over the period of 1995q1–2023q4. We follow the theoretical endogenous nexus of PSS with the financial fragility hypothesis (FFH) and finance-led growth regime; the nonlinear autoregressive distributed lag (NARDL) model and cointegration are applied for this purpose. The analysis suggests the following: (1) The selected determinants of the three stages of the FFH affect dependent PSS asymmetrically in the long run (as well as in the short run, sometimes); meanwhile, more often than not, significantly larger effects tended to be negative changes. (2) The asymmetric shocks of explanatories gently increase PSS in many cases but also decrease it strongly in others. (3) The “automatic stabilizer” role of PSS is proven, whereas the contrary is not rejected; that is, PSS was also used as a “counter-automatic stabilizer” tool. (4) This leads to “ratchet effects”; the direction of these effects is unclear, but it seems to decline over time. (5) The financialization of the PSS phenomenon is revealed and discussed using relevant economic interpretations for certain determinants, such as credits to nonfinancial corporations, relative profitability, domestic borrowing from abroad, and the snowball effect; all of these have long-term effects on PSS, comprising negative changes, with asymmetric dynamics towards a new equilibrium at a horizon of between 4 and 16 quarters. Policy implications are related to the sustainability of PSS through the control of the economy’s financialization. We contribute to the literature by analyzing—for the first time as far as we know—the endogenous nonlinear long- and short-run dynamics of PSS based on a comprehensive model of the FFH and the finance-led growth regime.