Eurozone Government Borrowing Soars as Countries Seek to Cushion Covid-19’s Blow

The European Union’s statistics agency said Thursday that government debt totaled 95.1% of GDP, more than reversing six years of progress in reducing borrowing from the previous peak of 94% of annual economic output.

The statistics follow last week’s estimates from the Treasury Department that showed the U.S. budget deficit tripled to a record $3.1 trillion in the fiscal year that ended Sept. 30, or 16.1% of economic output.

Despite a rise in debt that is unprecedented outside of war, governments on both sides of the Atlantic Ocean appear set to borrow heavily again next year, marking a sharp change from the aftermath of the financial crisis, when governments rushed to cut spending in painful austerity programs.

The International Monetary Fund, which at the time backed that austerity drive, urged European governments on Wednesday to continue to spend freely in support of businesses and households, and worry about rising debts later.

“Policy makers need to do whatever it takes,” said Alfred Kammer, director of the IMF’s European department. “We should not repeat the mistake of the global financial crisis.”

The IMF expects the eurozone’s budget gap to widen to 10.1% of GDP in 2020, from 0.6% last year. That is a much smaller deficit than the 18.7% it expects for the U.S., although the budget gap there had reached 6.3% of GDP in 2019, before the pandemic hit.

As a group of countries that cooperate on economic policy, the EU has rules designed to limit budget deficits, although they are often disregarded. Now, the bloc has suspended those rules, giving governments more freedom to continue to borrow large sums next year, while leaving it unclear what happens after that.

According to Oxford Economics, budgets for next year submitted by governments from the 11 largest eurozone members suggest they are going to use that freedom, since they envisage deficits of roughly 6% of GDP.

The IMF expects the U.S. government to run a deficit of 6.9% next year.

“The suspension of the bloc’s fiscal rules will allow governments to continue running expansionary policy next year, although policy could be substantially tightened in 2022 if the rules are reintroduced,” said Rosie Colthorpe, an economist at Oxford Economics.

Germany, which has long urged policies to reduce European government debt, said the eurozone’s future prosperity depends on governments sticking to the budget rules, although it didn’t say when they should be reactivated.

Economists who advise the EU want the bloc’s members to use the year of suspension to change the budget rules, which their critics say are difficult to understand and enforce.

“There’s a much greater sense that the basis for the rules needs to be examined,” said Niels Thygesen, chairman of the European Fiscal Board. “They certainly create some mutual mistrust.”

Eurostat said Greek government debt rose to 187.4% of annual output from 176.9% in the first quarter, while Italy’s debt rose to 149.4% of GDP. In Germany, government debt rose to 67.4% of GDP from 61.1%.

The disparity in the volume of debt eurozone countries carry has been a problem for the bloc’s economy in the past, since those governments that most need to spend during a downturn have been least able to. The EU has responded by launching a €750 billion ($890 billion) fund that will give governments access to grants and loans from a pool borrowed by the bloc as a whole.

While agreed in principle in July, the fund has yet to receive a final go-ahead, with some governments objecting to provisions that link access to meeting EU standards for independence of the judiciary, a free press and other governance practices.

However, bond investors expect it to start disbursing funds early next year, and newfound European political cohesion has helped lower the borrowing costs for Europe’s riskiest governments.

—Bertrand Benoit in Berlin contributed to this article.

Write to Paul Hannon at [email protected]