European Sovereign Debt: Is the Periphery a Problem?

Sovereign debt levels soared during the pandemic, and countries at the eurozone’s periphery may look high risk. But appearances can be deceptive.

Although the 2008 euro-area sovereign debt crisis seems well behind us, investors remain wary of a recurrence and nervous of high debt levels.

During the pandemic, shrinking economies and more interventionist fiscal policies increased debt-to-GDP ratios across Europe, leaving peripheral euro-area countries more vulnerable to economic shocks. While debt ratios have now stabilized, the European Commission forecasts they won’t fall much in the next two years and will mostly remain well above the limit required by the European Union’s (EU’s) Stability and Growth Pact (SGP). That sounds like a scary scenario—but it doesn’t tell the whole story.

Economies Are Healing After the Pandemic

Overall, the EU’s peripheral nations—Greece, Ireland, Italy, Portugal and Spain—have already reduced their debt-to-GDP ratios significantly since the pandemic and continue to make gradual progress (Display). Italy is the exception: its debt-to-GDP ratio is forecast to remain high (140%) until at least 2025, and its growth prospects are the lowest of the peripheral countries.

Debt-to-GDP Levels Are Falling as Growth Picks Up