Taming Public Debt in Europe: Outlook, Challenges, and Policy Response

IMF Working Papers, August 23, 2024

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Canonical URL: Taming Public Debt in Europe: Outlook, Challenges, and Policy Response

Authors: Saioa Armendariz, Ezequiel Cabezon, Larry Q Cui, Silvia Domit, Alina Iancu, Giacomo Magistretti, Rohan Srinivas, Yu Ching Wong
Published: August 23, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400285806.001

Public debt ratios in Europe increased significantly in response to the pandemic and energy shocks and have remained higher than before the pandemic in most countries.
Projected public debt trajectories are broadly flat overall in advanced Europe but have a rising profile in emerging Europe.
Government financing needs are still elevated.
The unwinding of quantitative easing by major central banks adds to financing pressures.
Important medium- to long-term spending pressures from defense, climate transition, and aging are not fully reflected in the projected baseline trajectories.
The risk that debts will not stabilize in the medium term has increased.
Debt stabilization will hinge critically on achieving ambitious fiscal consolidation and sustained growth.

Policymakers could target debt stabilization over a longer, 10-year, horizon.
Achieving stabilization should be coupled with adherence to credible fiscal rules such as the reformed EU Economic Governance Framework.
The combination of elevated financing needs, quantitative-easing unwind, and unaccounted medium- to long-term spending pressures implies a high probability consideration to reassure markets that debts will be tamed.

Pandemic shock consequences that raised debt ratios.
Energy shocks that increased borrowing needs.
Elevated government financing needs in the near term.
Monetary policy normalization: the unwinding of quantitative easing by major central banks.
Medium- to long-term spending needs linked to defense, climate transition, and aging that are not fully captured in baseline projections.

Implement carefully-calibrated fiscal adjustments that ensure debt sustainability while supporting growth.
Aim for ambitious fiscal consolidation combined with policies that sustain economic growth to stabilize debt.
Use a longer, 10-year, debt-stabilization target as a feasible framework to balance consolidation and growth while maintaining market confidence.
Adhere to credible fiscal rules such as the reformed EU Economic Governance Framework to anchor policies and market expectations.