Debt sustainability after the coronavirus crisis – interest rates and growth are pivotal

Around the world, government debt has grown dramatically in response to the coronavirus crisis. But how sustainable is the debt that has built up? This paper analyses the prospects for reducing government debt ratios using the examples of Germany and Italy. It focuses on longer-term developments from 2023, when both the recession and the immediate recovery phase will presumably have come to an end. On the basis of various scenarios, we demonstrate how crucial the relationship between interest rates and economic growth rates is for meeting the consolidation challenge. In the current environment of extremely low interest rates, Germany’s debt-to-GDP ratio could fall below the Maastricht threshold in the course of this decade already and even Italy could succeed in slowly reducing its debt ratio with only moderate budget surpluses. A structural increase in the interest-growth differential, on the other hand, would pose a great risk to Italy’s debt sustainability.

Debt sustainability after the coronavirus crisis – interest rates and growth are pivotal(PDF, 237 KB, non-accessible)