Only Greece and Portugal in southern Europe have a realistic prospect of reducing their public debt-to-GDP ratio over the next two decades, the German Economic Institute said on Wednesday.
According to a report by the Institut der deutschen Wirtschaft (IW), the debt index in southern Europe is expected to continue to rise, especially in France, Spain and Italy. As IW Senior Economist Bjorn Kauder notes in the report, Greece may be off to a worse start in terms of the numbers, but “will have a good outlook in normal times.”
Greece and Portugal have notable primary surpluses, while Greece also benefits from relatively low interest rates, according to the German institute.
Examining the possible evolution of public debt ratios in France and the four southern European EU member states, Greece, Italy, Portugal and Spain, the report examined three scenarios growing for the next 20 years.
The values predicted by the IMF for the year 2026 are continued. The second and third scenarios are based respectively on the evolution in the periods of four and eight years before the start of the Covid-19 pandemic. The results show that only Portugal and Greece can reasonably expect to reduce their debt ratios over the next two decades.
Both EU member states have remarkable primary balances. Moreover, the Portuguese economy is developing well while Greece benefits from relatively low interest rates.
However, even Portugal is unable to reduce its debt to the 60% of GDP envisaged by the Stability and Growth Pact. For France, Italy and Spain, a further rise in debt ratios is to be expected. This can be explained in particular by the weakness of the French and Spanish primary balances, while Italy continues to suffer from a sluggish economy. The sustainability of national budgets therefore remains a permanent political and economic challenge, particularly in view of the demographic adjustments that these countries are facing.