Euro Area Sovereign Credit: Some Ratings Under Pressure as Fiscal Challenges

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Source: Latest National Energy and Climate Plans, European Commission, NATO, Scope Ratings. Definitions: Interest: difference between 2020 and 2028 Scope Ratings forecast. Ageing: difference between 2035 and 2023 total cost of ageing expenditure based on EC 2024 Ageing Report. Defence: difference between 2023 defence expenditure and 2% target. Green: estimates based on latest National Energy and Climate Plans, assuming 1/3 public and 2/3 private investment shares.

France’s Fiscal Revisions Challenges Its Fiscal-consolidation Plan

France’s recent upward revision of its fiscal deficit to 5.5% of GDP for 2023 further challenges the government’s consolidation plan, which may now, according to the Court of Auditors, require additional savings of around EUR 50bn, or 2% of GDP, over coming years ahead of the 2027 presidential elections.

Similarly, in the absence of policy changes in Belgium following federal and regional elections in June, Scope expects Belgium to record the largest fiscal deficit in Europe, exceeding 5% of GDP over the coming years. This would result in a steadily increasing debt trajectory, and the third-highest public debt level in Europe by 2028, after Greece and Italy.

Difficult Context of Moderate Growth, High Public Debt and Rising Interest Payments

The difficult context for euro area governments stems from three challenges – moderate growth, high public debt, and rising interest payments – which coincide with pressures for higher spending and investment principally destined for the elderly, the environment and defence (Figure 1).

Together, these trends will strain fiscal budgets by an average of around 3-4% of GDP in coming years. This includes substantial investment needs to achieve carbon neutrality by 2050, which are estimated at about 0.5% to 1.0% of GDP per year for the public sector alone, based on European Commission data.

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