Can Advanced Economies Avoid Debt Distress?

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Many highly indebted advanced economies face a grim fiscal outlook; under current policies, public debt ratios of countries including Belgium, France, the United Kingdom, and the United States are set to deteriorate over the next two decades.
Financial markets have been forgiving so far, but recent tremors suggest greater sensitivity to negative fiscal or economic news, which could make borrowing more costly even for countries with highly liquid government bond markets.
AI-driven productivity growth may slow the increase in debt ratios and reduce the needed adjustment, but the magnitude and timing of this effect are unclear; population aging and growth declines linked to trade fragmentation and political uncertainty pull in the opposite direction.

Analysis covered EU countries, the UK, and the US over a 20-year horizon starting in 2024, divided into two periods:
- First period: a seven-year period in which governments raise the primary balance to a level that ensures debt sustainability.
- Second period: a 13-year period in which governments keep the primary balance constant, excluding spending changes driven by an aging society.
Used official growth forecasts and market-based projections for interest rates, exchange rates, and inflation, combined with simulated shocks, to generate probability distributions for future debt ratios under different scenarios for the primary balance (which excludes interest payments on the debt).
Objective: ensure a 70 percent probability that the fiscal adjustment in the first period was large enough to stabilize the debt ratio over the final five years of the 20-year horizon.

Required long-term primary balances to stabilize debt (examples):
- France: 1.3 percent of GDP.
- United States: 1.3 percent of GDP.
- Belgium: 1.8 percent of GDP.
- United Kingdom: 1.8 percent of GDP.
- Italy: 2.5 percent of GDP.
Adjustment magnitudes needed relative to 2024:
- About a dozen countries require adjustments of more than 3 percent of GDP.
- Five countries—France, Poland, Romania, the Slovak Republic, and the US—need adjustments of 5 percent relative to 2024.
On paper, almost all EU countries plan adjustments to stabilize debt ratios, but several use macroeconomic assumptions more optimistic than the EU’s common methodology (example: Germany assumes higher inflation and growth than expert forecasts).
Forecasts by the European Commission and the IMF suggest that countries with the biggest adjustment needs are unlikely to deliver the measures needed to stabilize their debt levels.

Primary balances at the levels needed to stabilize debt in several high‑debt advanced economies—and the large adjustments needed to get there from current fiscal positions—are rare historically.
- Example: France would need a primary surplus of 1.3 percent of GDP to stabilize its debt, which has happened only six times in five decades.
Positive precedents: Greece, Portugal, and Ireland transformed from crisis to discipline after the 2008 global financial crisis and subsequent EU/IMF programs:
- Greece posted a primary balance of 4.0 percent in 2024, adjusted for swings in the business cycle.
- Portugal needs only a minor adjustment of 0.5 percent of GDP.
- Ireland’s required adjustment is 1.9 percent of GDP, and its debt ratio is 39 percent of GDP.
- By comparison, the US debt ratio is 122 percent of GDP and the UK’s is 101 percent of GDP.
- Italy’s debt ratio is roughly 135 percent of GDP, but its cyclically adjusted primary balance is 0.3 percent of GDP.
Growth performance (2022–25):
- Average annual growth between 3.1 percent and 4.2 percent in Greece, Portugal, and Ireland.
- United States growth pace: 2.6 percent.
Lesson: Fiscal discipline and structural reforms—along with public and private debt restructuring when debt is unsustainable—pay off eventually; in past cases, reforms were largely driven by market pressure rather than domestic political momentum.

Best outcome (politically difficult):
- Combine growth-enhancing reform—including implementing the Draghi report’s single-market agenda in the EU—with deep reforms to social security and pension systems.
- Overhaul tax systems to raise revenue without discouraging growth (noted as particularly relevant for the US, the only OECD country without a value-added tax).
More likely political path:
- Shift in domestic political leadership that prioritizes fiscal discipline but not necessarily deep reform (Italy cited as an example of budgets broadly under control across political cycles).
Measures with limits and risks:
- Financial repression (encouraging domestic banks or institutions to absorb additional government debt) may be attempted but has limits.
- Surprise inflation could temporarily ease fiscal pressures, but persistently higher inflation would eventually drive up nominal interest rates.

Hard-landing scenario:
- A sudden spike in borrowing costs could trigger debt distress.
- As debt rises, interest rates could climb, and markets might become more sensitive to news that calls fiscal sustainability into question.
- Governments might attempt financial repression or rely on surprise inflation, both of which carry significant drawbacks.
Timing and feasibility concerns:
- Large required adjustments are historically rare and may take longer than the seven years envisaged by EU fiscal rules.
- If growth and inflation turn out lower than some national plans assume (example cited: Germany), projected deficits and debt will be much higher than planned.

Zsolt Darvas and Jeromin Zettelmeyer; March 2026; F&D Magazine.

Stabilizing Debt in Advanced Economies
- Stabilizing Debt in Advanced Economies (Markdown version)
- Stabilizing Debt in Advanced Economies (PDF)