On 11 March 2020 the World Health Organization (WHO) announced the global pandemic, and governments were forced to initiate non-pharmaceutical intervention (NPI) and disease containment measures. Governments had to come up with viable fiscal support measures and respective fiscal aid packages for the health and economic sectors, thus creating a unique opportunity to compare the quality of institutions and government effectiveness to manage, mitigate and lessen an economic crisis and a fall GDP, and measure the possibility of reaching the pre-crisis level of GDP. The analysis raised several issues, because in some countries the change in GDP in 2020 and the speed of recovery from the crisis and the attainment of the pre-crisis level of GDP of 2019 was slower, and at
the same time the size of fiscal resources used to tackle the fall in GDP were larger, and the respective public debt to GDP increased more. In order to comprehend why GDP, the fall in 2020, and the use of fiscal resources was smaller, this article aims to establish the role and statistical importance of the level of outstanding public debt, the quality of institutions, and government effectiveness as a driving factor of the respective volume of the fiscal resources used, minimising the size of the change in GDP in 2020 and promoting the recovery of GDP to the pre-crisis level.
The introduction of the Maastricht criteria was a crucial step in ensuring fiscal discipline and economic stability in the European Union. However, the crises of recent decades, including the Great Recession, the sovereign debt crisis, the Covid-19 pandemic, and the energy crisis, have revealed the limitations of these rules. Strict fiscal requirements have hindered countries’ responses to economic challenges, highlighting the need for a more flexible and adaptive fiscal policy to better withstand future economic shocks. The aim of this paper is to evaluate the effectiveness of the European Union’s fiscal rules over the 20-year period, analysing GDP growth differences between the EU and the Eurozone, as well as the fiscal performance of individual member states. It also seeks to
classify countries in groups based on economic indicators, identifying those with varying growth rates and levels of effectiveness in managing public finances. The study has revealed differences in GDP growth patterns between the European Union and the Eurozone, with the EU showing more favourable results. In analysing data from 27 EU member states over the 20-year period, four clusters were identified based on economic performance and fiscal policies: catching-up, slow-growing, underperforming, and cutting-edge countries. New members after 2004 demonstrated rapid growth, while countries like Ireland and Luxembourg stood out by their effective economic policies.
The Great Financial Crisis (GFC) of 2008 to 2010 increased the size of the public debt and decreased the fiscal space. The problem stems from the fact that fiscal resources are limited. Many OECD countries had used a substantial part of their limited fiscal space. Researchers suspected that higher levels of public debt in the future could slow down GDP growth. The first attempts to detect the tipping point at which GDP growth stalls or loses steam were made right after the GFC. However, the discussion was left open. The Covid-19 crisis required the further use of unprecedented amounts of fiscal stimulus resources to stabilise the economic situation. The objective of this paper is to establish whether new data of elevated public debt levels in relation to GDP confirms that higher levels of debt to GDP have an impact on future GDP growth and future financial stability. Debt and GDP data from OECD countries for the years 2000 to 2026 was used in order to carry out multilinear regression analysis, establishing the relationship between debt and future GDP growth. The results provide compelling evidence that the accumulation of higher debt levels slows down GDP growth, and require more fiscal resources in the future to stabilise the economic situation, compared with countries with lower accumulated public debt levels. Hence, higher inflation will require even more resources to service the debt.