The eurozone’s spiralling public debt

The eurozone’s accumulated public debt, first as a result of the banking sector bailout and later as a consequence of stimulating economies hit by the pandemic, remains at an unsustainable level. Spain remains among the most indebted countries in Europe, with a debt-to-GDP ratio that rose by 1.2 points year-on-year in the first quarter of the year.

 

Public debt is the volume of money that a state has borrowed directly or through the financial markets or, in other words, all unsettled payment obligations. It is a government’s tool for deferring its expenditures over time to fulfil the functions it has committed itself to.

By itself, sovereign debt is not necessarily a bad thing; it can serve as a lubricant to stimulate a stagnant or recessionary economy. It is often used in the first instance to slow down a slowdown in exceptional situations through aid and fiscal stimulus to prevent the destruction of the productive fabric.

This is what happened during the pandemic when governments around the world were forced to inject large amounts of money into their economies, exponentially increasing their sovereign debt to avoid a total collapse of the means of production.

As a general rule, however, this investment has to be accompanied by structural reforms that seek to improve the efficiency and competitiveness of the economy. Otherwise, public deficits can get out of control, perpetuating a sovereign debt that may end up being unsustainable.

That said, borrowing to make an investment that will generate value for the economy is not the same as borrowing to cover uncontrolled spending. It should also be borne in mind that some countries can afford high levels of debt because the financial markets have confidence in their ability to pay, thanks to the stability of their economies or their national currency.

 

The debt-to-GDP ratio

Although other variables are taken into account, the ratio of public debt to GDP is a key metric in the analysis of a country’s debt sustainability. In this respect, the eurozone countries barely cleaned up their public accounts in 2023.

According to an analysis by the Bank of Spain that consolidates the transactions between the different layers of the public sector, the Spanish state has gone from having a public debt of 384,662 million euros in 2007 to more than 1,668,440 million this year. This is a figure equivalent to 114.1% of GDP, which is almost 7 points higher than the official figure given by the government (107.7% of GDP, an increase of 1.2 points over the previous year) and far exceeds the EU average for the same indicator (95.9% of GDP).

Countries such as Greece, Italy and France are in a worse situation, partly thanks to the good performance of the Spanish economy, which grew by 2.5% in 2023 and far outperformed the euro area average. This contributed to the fact that the public debt-to-GDP ratio fell by 3.9 percentage points over 2023.

 

Fiscal imbalances are too high

In its latest report released last Wednesday, the European Fiscal Council equivalent to the Independent Authority for Fiscal Responsibility (AIReF) warns that in recent years, public spending has accelerated significantly in many eurozone countries, well beyond the temporary measures taken in response to the Covid-19 crisis and the subsequent rise in energy prices.

In this regard, it expects fiscal deficits in 2024 to turn out higher than previously projected and recommended. It adds that it is likely that the euro area will have to enter 2025 with a higher level of budgetary support than previously forecast.

Moreover, the organisation warns that Spain remains among the most indebted countries in Europe and that its debt has increased the most as a result of the sanitary crisis. Therefore, it will have to make adjustments of 7,000 million per year from 2025 and calls on the Spanish government to make an “extra effort” to adjust before reaching this scenario.

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