ECB says member states must start reducing debt immediately

EU Commission report said Ireland 'retains the capacity to service its debt' and despite a number of challenges, 'its economic, fiscal and financial situation is sound overall'

The ECB said budgetary efforts required by states in response to a number of challenges could amount to at least 5% of gross domestic product.

Eurozone nations must start reducing their national debt immediately in the face of enormous long-term fiscal risks from ageing populations, defence spending and climate change, the European Central Bank (ECB) has warned.

In an article, the ECB argued each of these developments would be challenging in isolation but a number of “countries will face all of them simultaneously”.

The ECB said “action needs to be taken today — especially in high-debt countries” grappling with elevated interest rates.

In relation to defence spending, the article does note that as Ireland — along with Cyprus, Malta, and Austria — is not a member of Nato, there is no requirement to spend as much as 2% of GDP on defence.

According to the ECB, budgetary efforts required in response to these specific challenges could amount to at least 5% of gross domestic product.

“The necessary fiscal adjustment is large by historical standards, but not without precedent,” it said.

The warning comes at a time of heightened concern about the sustainability of public finances in the 20-nation bloc — not least in France, where the shock announcement of snap elections, following the European elections, has raised doubts about fiscal consolidation which triggered market turmoil.

The European Commission has since reprimanded France, Italy and several other EU countries for running budget shortfalls above the bloc’s 3% limit.

“Fiscal-sustainability challenges are low in all EU member-states in the short term, while being elevated in the medium and long term in several countries, due to projected high and/or increasing debt ratios in some member-states,” the commission said.

The ECB said in addition to existing budgetary issues, which are often reflected in high debt ratios, further challenges loom that “will result in significant fiscal burdens in the decades ahead". Among those, it said, was digitalisation.

Governments would have to “immediately and permanently” increase primary balances by 2% of GDP on average to achieve a government debt-to-GDP ratio of 60% by 2070 from today’s debt levels, the ECB said.

On top of that, ageing, defence spending and climate change could widen the average deficit by about a further 3% of GDP, it said. 

In its spring 2024 post-programme surveillance report, the EU Commission said Ireland “retains the capacity to service its debt” and despite a number of challenges, “its economic, fiscal and financial situation is sound overall”.

According to the commission’s debt sustainability analysis, Ireland is assessed to face low risks in the short and medium term, while long-term risks appear to be medium. 

It added the outlook for the public finances was “benign”, though certain risks on fiscal sustainability persist, such as the impact of an ageing population and measures to offset the cost-of-living crisis.

“The proportion of the population over 64 relative to the working-age, 20 to 64, population is projected to more than double between 2022 and 2070, and pension system expenditure is estimated to increase by 2.8% of GDP in the same period, making Ireland one of the EU member states with a higher future cost of ageing," the commission said. 

"The establishment of saving funds could mitigate long- term fiscal sustainability risks."

As of the end of May, the country's national debt stands at €243.1bn.

Bloomberg