Olan McEvoy
Research expert covering the European Union for society, economy, and politics.
Get in touch with us nowEurope's decade of crises has increased government debt
The European Union has faced successive crises related to the government debt of its member states over the past decade. These debt-laden countries had been in crisis since the outbreak of the global financial crisis in 2007, with the economies and financial systems of Greece, Italy, Ireland, Portugal, and Spain being particularly severely affected. As these countries were forced to bail-out their collapsing financial sectors while their economies faltered, their debt-to-GDP ratios spiked and international financial institutions lost faith in their ability to repay loans, causing the interest rates on their borrowing to spike.By 2012, many commentators foresaw that Greece would have to abandon the Euro currency due to the inability to service its debt, with disaster only being averted after then-ECB president Mario Draghi declared that the EU was willing to do “whatever it takes” to save the Euro and prevent the exit of members. While the second half of the 2010s was a period of relative calm, with debt-to-GDP ratios falling, the COVID-19 pandemic required countries to substantially increase public spending. Due to fears of a repeat of the Eurozone crisis, the EU launched the NextGenEU stimulus package in 2020, which provided loans and grants based on common EU debt.
Is debt the problem or part of the solution?
The sustainability of government finances is one of the long-term issues which the EU must face in order to ensure the cohesion and stability of the union. There is much debate among economists in recent years as to whether the debt rules which are in place in the EU are helping to achieve debt sustainability, or in fact hindering it. The EU introduced the Stability and Growth Pact in 1997 in order to strengthen the rules set out in the Maastricht Treaty – while initially this seemed to be a success, as states reduced their debt-to-GDP ratios significantly in the early 2000s, the outbreak of the financial crisis and subsequent recession completely upended this progress.As growth stalled in the EU at the same time that governments were forced to bail-out their financial sectors, the debt-to-GDP ratio of many countries shot up. In some cases, commentators have claimed that the strict enforcement of the EU’s debt rules in the aftermath of the crisis, along with the structural reforms to labor markets and welfare systems, may have hampered these countries’ recoveries, rather than helped them. While some countries, notably Ireland, have been able to dramatically reduce their national debt through limiting government spending since then, countries such as Italy, Greece, and Spain have only been able to maintain the level of their debt due to weak growth. Critics now suggest that the lack of critical investments in many EU countries since the financial crisis has prevented economic growth, thereby worsening the sustainability of their debt.
