Risks, Vol. 11, Pages 71: Machine Learning Algorithm for Mid-Term Projection of the EU Member States’ Indebtedness

Risks, Vol. 11, Pages 71: Machine Learning Algorithm for Mid-Term Projection of the EU Member States’ Indebtedness

Risks doi: 10.3390/risks11040071

Authors: Silvia Zarkova Dimitar Kostov Petko Angelov Tsvetan Pavlov Andrey Zahariev

The main research question addressed in the paper is related to the possibility of medium-term forecasting of the public debts of the EU member states. The analysis focuses on a broad range of indicators (macroeconomic, fiscal, monetary, global, and convergence) that influence the public debt levels of the EU member states. A machine learning prediction model using random forest regression was approbated with the empirical data. The algorithm was applied in two iterations—a primary iteration with 33 indicators and a secondary iteration with the 8 most significant indicators in terms of their influence and forecasting importance regarding the development of public debt across the EU. The research identifies a change in the medium term (2023–2024) in the group of the four most indebted EU member states, viz., that Spain will be replaced by France, which is an even more systemic economy, and will thus increase the group’s share of the EU’s GDP. The results indicate a logical scenario of rising interest rates with adverse effects for the fiscal imbalances, which will require serious reforms in the public sector of the most indebted EU member states.