Growth effects of fiscal policy and debt sustainability in the EU

In this paper we study the relationship of fiscal policy and economic performance of some core countries in the EU. Our aim is to find out whether public deficit and public debt have consequences for real variables in the economies we consider. The background of our empirical study is a growth model that provides us with some predictions on the relationship between fiscal policy and economic growth. In a first step we then use Granger causality tests to analyze empirically whether some of the implications of our model are compatible with the data. In a second step, we investigate whether the fiscal policies of the member states have been sustainable. Given this information, we then pursue the question of whether differences in the fiscal positions of countries have consequences as concerns the outcome of our empirical tests of step one. Finally, we study whether the impact of the public deficit ratio depends on the magnitude of the debt ratio.