The corona crisis is increasingly proving to be a severe test for the debt sustainability of the EMU states. The financial and sovereign financial crisis of the euro states is now being followed by the third crisis in only about twelve years, which is having a noticeable impact on the debt ratios of the states. In the case of Italy, the debt ratio is expected to rise to 160% of GDP by the end of 2020.
In order to stabilise the debt-to-GDP ratio in the long term, the primary balance is the central factor influencing the debt ratio from the perspective of the states. Our results show that the primary balance that Italy needs to achieve in order to stabilise the debt-to-GDP ratio over the longer term rises to 3% of GDP as a result of the crisis. In recent years, Italy has consistently achieved significantly lower primary surpluses, which fuels fears that, without countermeasures, the country’s debt ratio is likely to continue to rise and debt sustainability would be at risk. Germany, despite a corona-induced increase in the debt-to-GDP ratio, could afford to maintain negative primary balances at a moderate level even after the crisis if the aim were to stabilise the debt-to-GDP ratio. In addition to the significant difference in debt levels between Italy and Germany, a major factor influencing the different results is that the difference between the refinancing costs of the government and nominal GDP growth has been greater in the case of Italy for years, but less than zero in the case of Germany.
While in Germany, following the corona crisis, there is likely to be renewed political debate as to whether the favourable fiscal conditions should be used more to reduce debt or strengthen structural growth, Italy can only dream of such options for action. In the absence of the political will to achieve a primary balance of 3% of GDP by its own efforts, only two options remain. Either long-term ECB bond purchases of Italian government bonds to further reduce refinancing costs or longer-term EU fiscal transfers to ensure a sufficiently high primary surplus. Politically, the other EMU countries will have to weigh up whether they are prepared to pay this price for the stability and unity of the eurozone.