Europe: A Bumpy Road to public debt sustainability?

The Covid-19 crisis and the inflationary shock have significantly strained the public finances of European countries, leading few of them – particularly France and the UK – to experience an increase in their debt-to-GDP ratios over the past five years, while others – such as Belgium and Portugal – successfully reduced theirs. Looking ahead, the ag e ing population, the energy and digital transitions, rearmament, and the rising cost of debt are the major structural challenges that European governments must address simultaneously as they heighten the risks of a slippage of debt-to-GDP ratio. How will public finances evolve in the medium term given these factors? How should the fiscal stance of the euro area adjust in accordance with national fiscal developments? What will be the trajectory of public debt in 2030 based on deterministic and stochastic DSA exercises? National budgets future path in dic ate that most countries will see their public debts to rise due to their current deficit levels , except Portugal and Spain . In the medium term, the consolidation of the primary deficit in some euro area countries (France, Spain, Belgium) will only offset the increase in the cost of debt within the euro ar ea , keeping the deficit of the euro area above the EU 3% threshold until 2030. Our indicators suggest that the sustainability of public debt in Italy, Belgium, and France appears to be at the greatest risk. In the case of France, the stabilization of debt to GDP ratio appears particularly challenging since the high level of debt would require a significant fiscal consolidation . B ut parliamentary deadlock hampers such adjustment efforts – at least in the short run – making public debt level in France vulnerable to the realization of negative external shocks. …