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

Saioa Armendariz, Ezequiel Cabezon, Larry Cui, Silvia Domit, Alina Iancu, Giacomo Magistretti, Rohan Srinivas and Yu Ching Wong

No 2024/181, IMF Working Papers from International Monetary Fund

Abstract: 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. Going forward, the 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, and the unwinding of quantitative easing by major central banks adds to financing pressures. Moreover, there are important medium- to long-term spending pressures from defense, climate transition, and aging, which are not fully reflected in the projected baseline trajectories. Against this backdrop, 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. Facing these elevated risks, policymakers need to implement carefully-calibrated fiscal adjustments that ensure debt sustainability while supporting growth. They could target debt stabilization over a longer, 10-year, horizon—while adhering to credible fiscal rules such as the reformed EU Economic Governance Framework—but with a high probability to reassure markets that debts will indeed be tamed.

Keywords: Public debt; Government financing; Debt stabilization; Optimal fiscal path; stabilization probability; government debt holding; financing pressure; Fiscal consolidation; Fiscal stance; Government debt planning; Government debt management; Europe; Global (search for similar items in EconPapers)
Pages: 26
Date: 2024-08-23
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