Fiscal Policy Effects on the EU Real Economy: Pooled Mean Group Approach

Abstract

This paper analyzes the key activities and scope of fiscal policy functioning, providing a balance between stimulating economic growth, as opposed to additional burden on economies due to the financing of public expenditure through borrowing. The subject of the econometric analysis is how the dynamics of public expenditure affect the real gross domestic product (RGDP) in the long-term on a sample of 27 member states of the European Union (EU) in the period 2004q1-2024q2. Based on the results of the research using the macro panel data method (Pooled Mean Group), the conclusion is drawn that there is a long-term positive equilibrium relationship between the increase in public expenditure and the growth of RGDP, confirming the theoretical assumption of the existence of Keynesian effects. However, the speed of adjustment of individual economies to the long-term equilibrium relationship is heterogeneous, due to the absence of a unified fiscal policy within the EU. Individual adjustments were the most intense in small open economies, Slovenia and Slovakia, which implies that in these economies the effects of public expenditure to stimulate the real economy were recorded to a greater extent. Less intense, but statistically significant adjustments were recorded in the central EU: France, Germany and Belgium, as well as the peripheral economies of the EU: Portugal, Spain and Italy. The observed effects imply economic policy makers reconsideration whether this measure of using the fiscal policy mechanism is justified, taking into account the sources of financing public expenditure.