The effectiveness with which Europe dealt with the coronavirus was a firewall against the threat that the pandemic posed to the economy. Two and a half years later, the debt incurred during the health emergency has brought most European countries to the brink. Soaring prices and interest rate hikes to curb inflation pose a risk of political and economic destabilisation, as well as fiscal destabilisation, in countries such as Greece, Italy, Portugal and Spain. And even France.
The strategy adopted by countries in the face of the coronavirus focused on protecting sectors of the economy. To achieve this goal in the most feasible way, central banks flooded the market with money. Interest rates were already at negative levels, so efforts to protect the economy and health systems were a measure available to all governments.
But from that, we have had to deal with the mud. Europe is now facing an unprecedented debt crisis. Greece's debt stands at 193 % of gross domestic product (GDP), Italy's at 151%, Portugal's at 127 % and Spain's at 118 %, according to Statista.
In the 1990s, Europe set four rules of orthodoxy, one of which was a debt limit of 60% of GDP. Now, not even the most orthodox large countries meet this target. France has 113%, Belgium 108% and Austria 83%. Germany has a debt of 69.3% of GDP. No one meets it. Nor will they for many years to come.
The most effective way to reduce the debt-to-GDP ratio is through economic growth, because the denominator increases and the ratio decreases. But the Ukrainian invasion is curtailing the economies' options for recovery.
This scenario has been exacerbated by the sharp rise in inflation. The glut of money in the European and US markets, with central banks failing to withdraw excess money, raised the spectre of inflation last year. The war has pushed up the cost of energy as well as food. All this has led the Federal Reserve to raise interest rates twice, by a total of 1.25 points, and experts predict three more increases in the price of money in the remainder of the year. The European Central Bank will also start raising rates next July.
Spanish debt fell to 118.4% of GDP in 2021, to 1.427 trillion euros. The problem with this debt is that, at the current time of rising interest rates, maintaining it will mean an increase in budget expenditure and less revenue available for services such as education and health.
The Spanish Treasury's issuance needs each year are usually around a quarter of a trillion euros, so each point of interest rate hike is equivalent to around 2.5 billion euros of added costs. If money becomes two points more expensive, an additional €5 billion has to be paid.