IMF Working Papers

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

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

August 23, 2024

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Saioa Armendariz, Ezequiel Cabezon, Larry Q Cui, Silvia Domit, Alina Iancu, Giacomo Magistretti, Rohan Srinivas, and Yu Ching Wong. "Taming Public Debt in Europe: Outlook, Challenges, and Policy Response", IMF Working Papers 2024, 181 (2024), accessed November 21, 2024, https://doi.org/10.5089/9798400285806.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Fiscal consolidation, Fiscal policy, Fiscal stance, Government debt management, Government debt planning, Public debt, Public financial management (PFM)

Keywords: Debt stabilization, Europe, Financing pressure, Fiscal consolidation, Fiscal stance, Global, Government debt holding, Government debt management, Government debt planning, Government financing, Optimal fiscal path, Public debt, Stabilization probability

Publication Details

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