The continuous rise in sovereign debt is no longer merely a consequence of temporary crises but has become the expression of a deep structural trend in many European countries, with roots extending back to the 1970s. Among the primary drivers of this process are demographic transformation accompanied by a rapidly aging population, long-term weak productivity and economic growth performance, and a political economy structure that makes it increasingly difficult for governments to limit spending or gain societal acceptance for fiscal consolidation. Indeed, the public debt crisis between 2010 and 2015 clearly exposed the fundamental design flaws of the Economic and Monetary Union. These include persistent macroeconomic imbalances, errors in national budgetary policies, and the lack of strong common stabilization and crisis management mechanisms. The COVID-19 pandemic has further deepened these problems and led to a marked increase in debt ratios in almost all member states.
Current analyses by the International Monetary Fund (IMF) clearly reveal the severity of the situation. Unless comprehensive and growth-supportive structural reforms are implemented, public debt in Europe is expected to enter a renewed trend of strong increase. By 2040, average public debt ratios are projected to reach approximately 130 percent of the gross domestic product. This rate is roughly 40 percentage points above the level assessed by the IMF as sustainable in the long term. External shocks, such as new financial market fluctuations, geopolitical tensions, or climate-related crises, could further accelerate this trend and place additional pressure on fiscal stability.
In addition to long-term structural burdens, geopolitical factors are becoming increasingly determinant on the budget balances of EU member states. On the one hand, substantial additional resources are needed for increasing defense expenditures, financing the energy transition, incentives provided within the scope of industrial policy, and military, financial, and humanitarian support for Ukraine. These expenditures are direct responses to Russia’s aggressive policies, the strategic competition with China, and the necessity of securing Europe’s technological and industrial sovereignty. On the other hand, rising government bond yields worldwide, as a result of monetary tightening implemented to combat inflation, severely limit the possibilities for EU countries to borrow under favorable conditions. Thus, a self-reinforcing cycle emerges. The narrowing of fiscal maneuvering space increases geopolitical dependencies, and these dependencies, in turn, necessitate new and additional expenditures.
In public debates, the increase in indebtedness is mostly associated with the rise in debt servicing costs. Indeed, increasing interest payments occupy a significant share in budgets, narrowing the discretionary space of fiscal policy and pushing expenditures critical for long-term growth-such as education, research, digitalization, and infrastructure-into the background. However, a point that attracts less attention but is at least as important is the implicit geopolitical costs caused by high public debt. High indebtedness weakens the capacity of EU member states to act jointly and decisively, deepens internal tensions between Northern and Southern Europe or between large and small member states, and erodes trust in central institutions. Both the European Commission, responsible for enforcing fiscal rules, and the European Central Bank, conducting monetary policy, face increasing political pressures. Particularly for the European Central Bank, there arises a risk that monetary policy may increasingly serve the purpose of stabilizing the debt sustainability of member states, a situation that carries the potential to create serious tensions with the price stability objective in the long run.
High public indebtedness also increases the vulnerability of EU member states to external developments. Sensitivity to sudden changes in the global interest rate environment and fluctuations in capital flows, in particular, rises markedly. Beyond this, public debt can also become an instrument of leverage and influence for external actors. The increasing presence of investors from third countries in European bond markets, including state-linked actors from China and large, wealthy funds in Gulf countries, brings with it the risk of the instrumentalization of financial dependencies for political purposes and the indirect influencing of member states’ strategic decisions.
Compared to the United States and China, the EU still possesses limited capabilities regarding large-scale capital mobilization. Restricted fiscal room for maneuver, fragmented capital markets, and an incomplete banking and capital markets union render Europe particularly defenseless against external shocks. Despite repeated political initiatives, the integration of financial markets and the restoration of Europe’s international competitiveness are progressing slowly. The conclusions reached by the reports prepared by Enrico Letta and Mario Draghi clearly confirm this situation: a rapid and radical breakthrough that would lead to significant private capital inflows into Europe is not expected to occur in the medium term.
The EU is also characterized by a strongly decentralized fiscal structure. Within this structure, the economic and fiscal policy orientation of three large member states-Germany, France, and Italy-plays a decisive role. Together, these three countries are responsible for approximately two-thirds of the total public debt of the Eurozone. However, due to limited budgetary spaces, these countries are increasingly struggling to radically transform their economic models and adapt to new geopolitical realities. Particularly in France, the deterioration in public finances leads to increasing polarization in economic policy debates and the strengthening of populist trends. This situation not only damages confidence in the country’s economic management capacity but also confronts the already fragile institutional architecture of the monetary union with serious tests.
In the competition experienced on a global scale for capital and economic influence, the stability of the euro and the integrity of the European internal market rank among the few hard strategic assets remaining in the European Union’s possession. However, these gains are not certain or permanent. A new euro crisis, in which Germany can no longer assume a stabilizing role and the European Central Bank’s monetary policy tools lose their effectiveness, would mean not only an economic shock for the European Union but also a geopolitical rupture that would generate far-reaching consequences. In this context, the long-term sustainability of public finances must be addressed as an integral element of Europe’s geopolitical resilience and be firmly institutionalized at the political level. Therefore, a credible fiscal policy supported by structural reforms and deeper European integration is not only an economic necessity but also one of the fundamental conditions for the European Union’s strategic capability of maneuver in the 21st century.
