Debt and economic growth in the European Union: A panel Granger causality approach

By using panel Granger causality estimations this paper contributes to the empirical investigation of the causality relations between real GDP growth and the growth of three debt categories, namely public, foreign and private debt, in the universe of the 28 European Union countries during the past decade. It also analyses the possible differences after the outbreak of the recent financial crisis considering two panels: 2001–2012 and 2007–2012.

The main findings point to some clear differences in the Granger causality relationships between the three considered debt categories and economic growth. The results confirm the statistically relevant bidirectional causality relationships between public debt and economic growth.

Moreover, for both time periods, the results obtained are stronger for the causality running from real GDP growth to the growth in public debt than for the reverse causality running from public debt to economic growth. Furthermore, there is evidence of some Keynesian effects documented by the clear positive causality running from public debt to economic growth and these effects were particularly strong for the years after the outbreak of the recent global financial crisis (here represented by 2007–2012).

The results obtained for foreign debt point to statistically weaker causality relationships between this debt and the economic growth rate in EU countries but there is still a general tendency towards positive bidirectional causality relationships between foreign debt and economic growth. Finally, for private debt the results point to its relevance for the economic growth of EU countries during the past decade and there is clear evidence of negative causality running from private debt to the real GDP growth rate for the entire time period (2001–2012).