Sovereign debt of the euro area
The ongoing pandemic has led countries around the world to take exceptional economic and financial measures. In the euro area, national measures were followed by pan-European actions.
As a result, debt ratios have increased. During the previous financial and sovereign debt crisis, debt ratios in the euro area fell from 65.9% of GDP in 2007 to around 93% of GDP five years later. By the end of 2019, the ratio had only fallen to 87% of GDP, showing how difficult it is to bring government debt back to its pre-crisis level.
At present, we expect the euro area public debt to increase from around 15% of GDP to over 100% of GDP in 2020. Italy, Spain and Greece are expected to experience the largest increases, with debt-to-GDP ratios rising over 25%.
As we expect many eurozone governments to provide more stimulus and possibly cancel some of the guaranteed loans to tackle the second wave of the pandemic, debt ratios are likely to rise further. As a result, discussions on how to ultimately reduce debt levels could resume quickly.
We expect the euro area public debt to increase by around 15% of GDP to over 100% of GDP in 2020.
According to our calculations, even with a return to fiscal balances and nominal growth in 2018 and 2019, it would take until 2029 for the euro area to return to pre-crisis debt levels. Luxembourg and Ireland could already return to their 2019 debt level by the end of 2021 while Germany could reach its pre-crisis debt level by 2023. However, countries with a high level of debt before the crisis, such as Greece, Spain or France until 2030, 2031 and 2032, respectively. Italy – the country with the second level of debt before the crisis – would take until 2060 to be able to reach a debt-to-GDP ratio of 134.4%.
If governments continue their accommodative fiscal policies – again all things being equal – nominal growth is expected to jump to 14.1% of GDP from 2021 to 2025 to bring debt levels back to their 2019 level. For example, If Germany were to continue with current fiscal policies, the country would need annual nominal GDP growth of nearly 18% to return to pre-crisis levels by 2025.