Technical Efficiency and Financial Sustainability of Farms in the EU: A Stochastic Frontier Analysis and Panel Data Regression Approach

The EU agricultural policy for the period 2023–2027 assumes that improving technical efficiency strengthens the financial sustainability of farms, an assumption rarely tested rigorously at EU country level, or with an explicit distinction between solvency and profitability. Using FADN/FSDN data for 402 country-year observations of arable farms in 28 European countries (2010–2024), technical efficiency is estimated by a fully unrestricted translog stochastic frontier, statistically preferred over the Cobb–Douglas form (χ2 = 177.57, df = 10, p < 0.001), and validated by comparison with Data Envelopment Analysis (DEA) and a metafrontier decomposition (EU-15 versus EU-13). The one-year lagged score is entered into panel models of solvency, profitability and regional heterogeneity, estimated with two-way fixed effects (country and year) and robust Driscoll–Kraay standard errors. Lagged technical efficiency shows no robust average effect on solvency or profitability (all p > 0.45), and its marginal effect on solvency does not differ significantly between EU-15 and EU-13 farms after correcting for multiple comparisons (p = 0.352). Farm size, on the other hand, is significantly and negatively associated with solvency, and debt ratio is the most consistent determinant of profitability, identifying capital structure as the more robust channel linking farm operations to financial performance. This divergence between channels shows that farm financial sustainability is not unidimensional: at the one-year horizon tested, efficiency gains do not reliably translate into stronger farm finances, which calls for caution in treating efficiency-oriented support as a general lever for the CAP’s financial sustainability objectives.