Eurozone debt trajectory by 2024E
2020 jump in debt should be a one-off in most countries, but not in Italy
We now estimate that the Eurozone fiscal deficit will rise to at least 7% of GDP this year, while public sector debt should jump by c.10pp, close to 97% of GDP. Deficits and debt might well rise further if and when Eurozone governments unveil demand stimulus measures over the coming months. Our debt simulations for the coming years suggest that most countries will see a one-off jump this year, before debt stabilises at the new, higher levels. By 2024, this would be around 98% of GDP in the Eurozone, 115% in France and 109% in Spain. German debt should fall back to 67% of GDP, while Italy’s position would appear more vulnerable, rising further to 155% by 2024E. We warn that new contingent liabilities (e.g. government credit guarantees) and private sector bailouts could pose additional, potentially meaningful risks to future debt levels.
How can Europe keep its public debt manageable?
We see little scope for Europe to boost its nominal GDP growth or to quickly reverse this year’s fiscal easing in full. This implies that, to keep public debt manageable, the Eurozone will remain crucially dependent on interest rates staying very low for the foreseeable future. The ECB will, in our view, have to keep policy rates in negative territory and continue with its asset purchases for a lot longer. We also think ESM programmes might have to play a role in keeping funding costs low and debt maturities long enough. The debate about mutualisation of debt is already in full force. The political hurdles for common debt issuance and subsequent transfer of funds via loans without meaningful conditionality (through the ESM or a new unemployment insurance fund) seem to be coming lower. But the bigger question is whether the Eurozone is ready for a much larger step towards full mutualisation: common debt issuance and distribution of funds via grants. This week’s crisis meetings by Eurozone finance ministers and EU leaders will be of huge importance for Eurozone integration.