Why Europe can’t escape the fallout from $40 trillion US debt woes

The United States government’s $40 trillion debt pile is rapidly becoming everybody’s problem. Government borrowing costs around the world have leaped to their highest in years in recent days, reflecting fears that war, demographic decline and the imponderable consequences of technological change are all stretching Washington’s finances to breaking point. That’s spilling over into financial markets in Europe, too, because European governments have to compete with Washington for the global pool of savings. And that competition has gotten a lot stiffer this year as U.S. tech giants have borrowed hundreds of billions of dollars in pursuit of artificial intelligence-related riches. Germany’s 10-year borrowing costs, which set the tone for the rest of Europe, hit their highest since 2011 earlier this week, after fears of inflation and a widening U.S. budget deficit drove the benchmark U.S. 30-year Treasury bond yield — how much investors get back when they lend to the government — to its highest in 19 years. Compounding the problem was the news that the U.S. government’s debt has now topped $40 trillion. As a result, many EU governments are likely to face extra pressure for tax increases or spending cuts — even as they try to boost spending on defense — when they return from their summer breaks to plan their budgets for next year. And in countries such as France, Spain and Italy, that could easily play into what are in any case likely to be explosive national elections next year. French far-right leader Marine Le Pen was already using the situation on Wednesday to push what is likely to be one of her key messages at the presidential election next spring, calling the rise in bond yields an “implacable reckoning for 10 years of Macronism.” “It’s time to clean the Augean stables that the public finances have turned into!” Le Pen said via social media. She offered no details of how she intended to do so, however. Bruno Le Maire, who served as France’s finance minister for seven years, retorted that her party had always frustrated the efforts of President Emmanuel Macron’s governments to bring the budget deficit back under control — notably by forcing it in 2025 to abandon a proposed pension reform. The slow squeeze France’s failure to correct course over the years has steadily eroded the confidence of investors, who now demand higher costs to buy French bonds than for similar Italian ones. As a result, Paris is especially vulnerable to a phenomenon that affects almost all European capitals, known as refinancing risk. Most countries in Europe have accumulated huge debts in the last 20 years, with periodic crises such as the pandemic or the 2008 financial crisis amplifying a steady, long-term deterioration in public finances due to rising health and pension obligations. A measure looking at the debts of the public sector across the eurozone rose from 66 percent of GDP in 2007 to just under 88 percent last year. And the European Commission expects it to keep rising in the near term as budget deficits widen again under the strain of war in Iran and Ukraine. The European Central Bank has already raised interest rates once this year. | Boris Roessler/picture alliance via Getty Images As long as the European Central Bank kept interest rates close to zero, as it did from 2009 to 2022, the interest bill on that debt was manageable. But with inflation again rearing its ugly head, the equation has changed. The ECB has already raised interest rates once this year as the U.S. and Israel’s war in Iran drove up oil and gas prices. David Rees, Schroders’ head of global economics, expects another two quarter-of-a-percent hikes by year-end. Consequently, bonds that cost next to nothing to issue 10 years ago (investors were even paying Germany to borrow from it as late as 2022) now have to be refinanced at rates much closer to historically normal levels. French national statistics office INSEE estimates that Paris’ spending on debt interest w