This paper investigates the determinants of external debt in EU periphery. The goal is to contribute to the ongoing debate on the determinants of external debt and to subdue it by adopting the right policy reform. To answer this question the study implements a quantitative research methodology using econometric techniques with monetary, financial, fiscal, trade, and labor market policy variables with time-series data over the period of 1980 to 2013. The estimated econometric results with OLS technique suggest that while fiscal policy variables such as budget deficit and corporate tax rate are the most important factors in shaping external debt in Italy and Spain; monetary, financial, and trade policy variables are more important for Greece and Portugal. Interestingly, none of the labor market variables have a statistically significant impact on the foreign debt of EU peripheral countries. The policy implication is straight forward; contrary to what has been proposed by international institutions to reform the labor market, Greece and Portugal need to focus on trade and monetary policy reforms, while Italy and Spain should put more emphasis on fiscal policy reforms, particularly tax reform.

external debt, fiscal policy, financial development, capital outflow, corporate income tax rate, openness, trade policy reform