Indebtedness and growth in the EMU before the Covid-19 pandemic shock

Abstract

Rising debt can threaten macroeconomic, financial, and fiscal stability, and thus fuels uncertainty among economic agents. Therefore, high levels of indebtedness may hinder economic growth especially for those economies with a large debt burden and may also amplify the volatility of GDP growth rates. This can be particularly true when we consider a currency area, such as the European Monetary Union (EMU), whose economies are characterized by different structural features and by political and social instability. In 2019, the private and public debt of the EMU reached 206% and 86% of GDP, respectively. The purpose of this paper is to investigate the relationship between economic growth and debt for the EMU countries during the 2000-2019 period using a two-steps approach. We first provide a breakdown of private and public debt-to-GDP ratios and their changes over time, both at the eurozone-level and at country-level. Then we employ fixed effects panel regression to investigate the relationships between i) real GDP per capita growth and debt, and ii) GDP growth volatility and debt, and to investigate which channels could be responsible for the effects of debt on economic growth. It emerges that debt-to-GDP ratios are linked negatively to economic growth and positively to growth volatility. Some policy implications arise, such as the need to stabilize private and public debt, promote growth, and foster coordination among the policies of the EMU member states.

Keywords

• private debt
• public debt
• economic growth
• growth volatility
• euro area