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Eurozone government debt - Quo vadis from here?

  • The fiscal version of “whatever it takes” triggered a notable deterioration in public finances across the Eurozone in 2020. However, the picture has never proven more heterogeneous at the country level: Seven countries (Greece, Italy, Portugal, Spain, Cyprus, France and Belgium, together representing more than 50% of Eurozone GDP) now boast debt-to-GDP ratios close to or above 120% of GDP i.e. twice the Maastricht debt target.
  • The Covid-19 debt overhang will prove sticky: In 2021-22, the Eurozone debt-to-GDP ratio should largely stabilize at around 100% as deficits remain bloated. But what happens after 2022 is anyone’s guess, depending on a complex mix of assumptions. Our interactive Debt Tool provides a whole range of possible outcomes for the trajectory of government debt in selected Eurozone countries over a 15-year horizon. The key takeaway: Unless Eurozone heavyweights, including France, Spain and Italy, register notable increases in nominal GDP growth and/or improved primary balances, a return to pre-crisis debt-to-GDP levels by 2035 is clearly not on the cards. In particular, a return to a fiscal ‘business as usual’ – i.e. to the average nominal growth and primary balance observed over the period 2000-19 – would see sovereign debt ratios in key economies move largely sideways over the next 15 years. While Germany would get back to pre-Covid-19 debt levels by 2028, other Eurozone heavyweights would need a lot longer (France 67 years, Italy 26 years and Spain 89 years).
  • What are the implications for EU fiscal policy in a world where 90% could be the new 60%? The Covid-19 shock will leave a longer-term impact on the region’s public finances, not just in the form of a lingering debt overhang but also by reinforcing a paradigm shift when it comes to the thinking around public debt and fiscal policy. However, in a context where flows trump levels, debt is not only bad, active fiscal policy is the main game in town and the planning horizon is becoming increasingly more long-term, a common debt anchor – why not 90%? – is all the more important to ensure fiscal policy soundness and in turn debt sustainability. Meanwhile, cosmetic changes including separately disclosing the Covid-19 debt overhang from the remaining government debt stock, or more controversial proposals such as the cancellation of sovereign debt held by the ECB, will change nothing of substance and could in fact undermine fiscal credibility.


Katharina Utermöhl
Allianz SE