Public debt sustainability in the Eurozone : an empirical assessment using macroeconomic indicators

This study examines public debt sustainability in the Eurozone by estimating fiscal reaction functions that assess how fiscal balances respond to rising public debt under heterogeneous macroeconomic conditions. Using annual panel data for 20 EU countries from 2000 to 2024, we employ fixed effects, system Generalized Method of Moments (GMM), and nonlinear specifications grounded in the intertemporal budget constraint framework. The results indicate that, under fixed effects, fiscal balances respond negatively to higher debt levels, consistent with the presence of fiscal fatigue. In contrast, dynamic GMM estimates reveal weak or statistically insignificant debt responses, while confirming strong fiscal persistence and a positive role for economic growth. Nonlinear specifications suggest that fiscal responsiveness weakens at high debt levels, with adjustment capacity further strained during major crisis episodes. Inflation and interest rates exert adverse effects on fiscal balances, whereas GDP growth supports fiscal sustainability. In summary, the findings highlight substantial cross-country heterogeneity and raise doubts about the effectiveness of uniform fiscal rules in the European Union, lending support to calls for more flexible and country-specific fiscal frameworks.