Public Debt and Economic Growth in EU Countries

Abstract

The short- and long-term effects of public debt on economic growth in EU countries is analyzed in this paper, using data that covers a period of 25 years (1995–2019). For public debt, we used a proxy general government gross debt (as a percentage of GDP), while for economic growth, we used the real GDP per capita growth rate. In addition, our models include a set of control variables to highlight the impact of other determinants on economic growth. We utilized several econometric methodologies related to ARDL (autoregressive distributed lag models), such as the pooled mean group (PMG), the mean group (MG), and the dynamic fixed effects (DFE) models. The results of the study show that in both the short and long term, an increase in public debt is negatively and significantly associated with economic growth. Specifically, in both the short- and long-term analyses, the estimated coefficients of public debt were statistically significant and negative, while the magnitude of the negative impact on economic growth differed. In view of these findings, we consider both the rigorous monitoring of the level of public debt and the control of public allocation to support economic growth to be of major importance.