Industrial investment relies on increasing debt, economic growth is weak, IMF warns of "explosive" risks in European debt

Bloomberg reported on the 13th that in the face of severe financial pressures such as population aging and energy transition, the "fragmented" debt response strategy adopted by many European countries is no longer sustainable. A recent report from the International Monetary Fund (IMF) states that "if spending pressures are not resolved in the long term, the debt situation of many European countries may fall into a vicious cycle of getting out of control." A Bloomberg survey conducted in early July showed that economic analysts lowered their Eurozone economic growth forecast for 2026 to 0.5%. This is lower than the 0.7% expected last month and also lower than the 0.8% in the European Central Bank's benchmark scenario.

European countries significantly increase borrowing

Due to population aging, green energy technology innovation, and increasing strategic investment pressure in the defense sector, Europe's public debt levels are accelerating. The IMF warns that with Europe's current debt levels, if it does not accelerate the implementation of business and labor reforms, increase taxes, curb social spending, and improve government efficiency to reduce the deficit, it will face "explosive" debt risks.

IMF Deputy Director for Europe, Herg Berg, and Deputy Director for Europe, Andrew Hodge, further analyzed that population aging has pushed up pension and healthcare expenditures in Europe. At the same time, as governments around the world prepare for war and geopolitical tensions, the costs of defense and energy transition are also rising. In this context, European countries have significantly increased their borrowing, and the public debt of many member states has become unsustainable.

The UK, France, and Belgium are particularly concerned, as their borrowing volumes have reached or exceeded their total economic output. According to a report by the Belgian newspaper Brussels Times on the 10th, the European Commission predicts that the eurozone's public debt will account for 90.2% of GDP by 2026 and 91.2% of GDP by 2027.

IMF analysts suggest that governments around the world should shift towards more cautious and forward-looking fiscal strategies, combining reform and fiscal consolidation, and making more fundamental choices regarding the scope of public services and their financing methods when necessary

Spain's debt plan sparks disagreements

Bloomberg reported that the IMF's analysis further reinforces a series of recent warnings about sovereign countries' fiscal fragility. Regarding the current debt situation, Bloomberg quoted economists as saying that most countries still need to make fiscal adjustments. Some heavily indebted countries may have to go further and consider taking more aggressive measures.

At the Eurozone finance ministers' meeting held in early July, Spain attempted to push the EU to request an additional 850 billion euros in annual borrowing on behalf of its member states. The US political news website reported that "Spain's latest debt plan may lead to internal divisions within the European Union." Countries such as France and Spain, which advocate for increased spending, have formed a clear opposition with countries such as Germany and the Netherlands, which are concerned about debt sharing.

According to reports, after the EU launched its first joint debt program in 2021, some heavily indebted member states could benefit from the lower borrowing costs of the European Commission due to differences in economic conditions and credit ratings among internal countries, while countries with relatively low debt and good credit ratings "did not benefit at all". This has led to ongoing controversies about "debt equity".

In addition to Spain, some countries have also taken action to address the issue of high debt, but economists say that "fiscal choices will become increasingly limited, controversial, and far-reaching. If we continue to respond to these challenges in a fragmented or passive manner, that is, the 'just do it' approach adopted by many countries, it will have serious consequences

Expert: Debt dilemma may persist for a long time

Regarding the current debt problem in Europe, Professor Cui Hongjian from the Institute of Advanced Studies in Regional and Global Governance at Beijing Foreign Studies University stated in an interview with Global Times on the 14th that the core issue of the European debt problem lies in the long-term weak economic growth in Europe, with most countries experiencing growth rates below 1% for a long time. The space for fiscal revenue growth is narrow, and while expenditures continue to expand, fiscal revenue shrinks, and the debt burden continues to accumulate. Although many major economies around the world are in a high debt state, Europe is under even more special pressure due to the combination of old debt and new expenditures: sluggish corporate profits, shrinking market-oriented financing channels, and strategic industrial investment that can only rely on government finances to support it, "he said.

In addition, there are still significant development contradictions within Europe at present. Cui Hongjian stated that European countries are well aware of the high debt risk, but are eager to compete with China and the United States in strategic industries such as AI and new energy. They believe that if public investment is reduced, the industry will be completely widened by China and the United States, and can only rely on increasing debt to increase industrial investment, falling into a vicious cycle of continuous debt expansion. He believes that compared to debt risk, European countries currently place more emphasis on defense security and global industrial competitiveness. Under this balance, they can only continue to expand their finances and increase debt in the short term. Therefore, the dilemma of difficult debt may persist in the long run.