Is there a Greek‐Turkish arms race?: Evidence from cointegration and causality tests†

Insightful comments and constructive suggestions by Keith Hartley and three anonymous referees are gratefully acknowledged. The authors also wish to express their sincere thanks to Bruce Hansen for kindly offering his FM estimation software. The usual disclaimer applies. The views expressed in the article are those of the authors and are not necessarily shared by the Centre of Planning and Economic Research.

Abstract

Greece and Turkey are both members of NATO and are two of the principal players in the Balkan region. Their respective defence burdens (i.e. the share of military expenditure to GDP) are the highest in NATO. Their bilateral relations are marred by serious friction and conflict of interest and have on a number of occasions come close to an armed confrontation. Their strategic interaction and mutual weapons build‐up has recently attracted the attention of researchers in the field testing the hypothesis of a Greek‐Turkish arms race with conflicting results. This paper, using cointegration and causality tests, finds evidence of a systematic armaments competition between the two countries provided that a defence policy regime shift estimated to occur in 1985 is explicitly taken into consideration. This policy regime change is associated with the stagnation of defence spending in Greece owing to the gradual deterioration of Greek public finances over the last decade.

Key Words:

• Greece
• Turkey
• Military spending
• Arms racing
• Granger causality
• Cointegration
• Structural breaks

Notes

Insightful comments and constructive suggestions by Keith Hartley and three anonymous referees are gratefully acknowledged. The authors also wish to express their sincere thanks to Bruce Hansen for kindly offering his FM estimation software. The usual disclaimer applies. The views expressed in the article are those of the authors and are not necessarily shared by the Centre of Planning and Economic Research.