Public debt and growth in Europe: the role of institutions

Résumé En

This paper investigates the impact of public debt on the long-term growth of GDP per-capita in an « enlarged European Union » of 32 countries, over a period of 18 years starting in 1994. More precisely, it focuses on the non linear relation between debt and growth and the extent to which both the quality of institutions and the debt trajectory, in addition with its level, may modify the impact of debt on growth. Our main results are: (i) when no country specific factor is taken into account, the negative growth effect of indebtedness is reinforced as debt-to-GDP ratio exceeds about 60% in countries outside the Euro Area, and 70% within the Euro area; (ii) growth effects of debt trajectory seems larger than those of debt level; (iii) country specific factors such as the quality of institutions and the origin of legal systems, modify the debt – growth relation: the debt trajectory, and not only its level, affects significantly and negatively the economic growth. 2 The quality of institutions dampens this effect. (iv) this negative effect is relevant only in countries whose legal system has French or socialist roots.