Growing fiscal risk in European Union resulting from government contingent liabilities in the pandemic crisis – assessment and policy recommendations

Abstract

The pandemic crisis, responsible for increased levels of financing with public debt and contingent liabilities, may trigger another debt crisis across the European Union. Our research indicates that member states are increasingly willing to use public guarantees and other off-budget instruments, which are classified as "hidden debt" or "hidden expenditure". Simulations have shown that if public guarantees have to be covered by the budget, an unprecedented increase in a public debt may occur across the euro area countries and the entire EU as a whole. Therefore, the authors recommend the introduction of uniform rules for estimating fiscal risk due to contingent liabilities, as well as standards for their reporting, allowing for their constant monitoring at the EU level.

Do contingent liabilities affect dividend decisions?

“…Our results show that contingent liabilities are negatively associated with dividend decisions. We support the literature (Anghel et al ., 2021; Liu et al. , 2022) that contingent liabilities increase uncertainties for firms; hence, firms with higher contingent liabilities pay less dividends.…”

Quantifying the Economic Survive Across the Eu Using Markov Probability Chains

“…The whole cluster approach uses a hierarchical agglomerative classification (HAC) on 2020 data. A less optimistic approach to the pandemic crisis is taken by some authors (Anghel et al, 2022) who consider that increasing levels of public debt financing and contingent liabilities may trigger another EU debt crisis. This is at a time when Member States are increasingly using public guarantees and other "hidden" extra-budgetary instruments.…”