Euro Zone Debt-to-GDP Ratio Declines, but Concerns Remain

The aggregate debt-to-GDP ratio in the Eurozone improved in 2023, declining to 88.6% from 90.8% the previous year, per data released by Eurostat. This marks a step towards pre-pandemic levels, when the ratio stood at 84% in 2019.

However, the ratio remains significantly higher than its historical norm of around 69% before the 2008 global financial crisis. According to Moody's Analytics, the debt-to-GDP ratio is expected to continue declining gradually over the coming decade.

While government spending is expected to remain robust in the short and medium term due to ambitious plans for green, digital, and defense initiatives, as well as aging population-related expenses, Moody's Analytics projects that GDP growth and declining borrowing rates will outpace expenditure increases, leading to a reduction in debt as a percentage of GDP.

Despite the improvement, the elevated debt levels raise concerns about sustainability. High debt could push interest rates up, potentially crowding out private investment and limiting government spending and borrowing capacity.

Read More: Global Economy Shows Signs of Sustained Growth, But Inflation Concerns Remain

The European Central Bank (ECB) has room to cut interest rates before sovereigns' refinancing needs become more pressing. As of 2022, the average term to maturity for nearly 50% of government debt in the Eurozone exceeded five years. However, almost 18% of the debt had a maturity of less than one year, which will need to be refinanced at prevailing interest rates, potentially increasing interest payments and deficits.

Moody's Analytics notes that the ECB's ability to maintain low interest rates will be crucial in managing the Eurozone's debt burden and preventing it from becoming a drag on economic growth.

Governments may soon see a lesser burden in interest payment. Last week, Christine Lagarde, president of the ECB, said in a CNBC interview, "If we don’t have a major shock in development, we are heading towards a moment where we have to moderate the restrictive monetary policy." The market is currently widely expecting a rate cute in June.