The US national debt has surpassed a record $40 trillion, quickly becoming a problem for everyone.
In recent days, the cost of government borrowing around the world has risen sharply to its highest level in years. This reflects concerns that war, demographic decline and the unpredictable consequences of technological change are testing Washington's finances to the breaking point, writes Jeffrey Smith in his commentary for "Politico".
The trend is also spreading to financial markets in Europe, as European governments must compete with Washington for access to the global pool of savings. The competition has become significantly fiercer this year as US tech giants have borrowed hundreds of billions of dollars in a bid to win the race for artificial intelligence.
The cost of servicing 10-year German government bonds - which set the tone for the rest of Europe - hit their highest level since 2011 earlier this week. This came as inflation concerns and a growing US budget deficit pushed the yield on the benchmark 30-year US Treasury note (a measure of the return investors get when they lend to the government) to its highest level in 19 years. The situation has been further complicated by the news that the US national debt has now surpassed the $40 trillion mark.
As a result, many governments in the European Union are likely to face additional pressure to raise taxes or cut spending - even as they try to increase defense spending - when they return from their summer break to plan next year's budgets. And in countries like France, Spain and Italy, this could easily affect next year's national elections, which are already shaping up to be extremely tense.
As early as August 19, the leader of the French far-right Marine Le Pen used the situation to impose one of the messages that will likely be key in her campaign for the presidential elections next spring, calling the rise in government bond yields "the inevitable payback for 10 years of Macronism."
"It is time to clean up the Augean stables that public finances have become!", Le Pen declared on social media.
However, she did not offer details on how she intends to do this. Bruno Le Maire, who served as France's finance minister for seven years, argued that his party had always obstructed efforts by President Emmanuel Macron's governments to rein in the budget deficit - notably by forcing the cabinet to abandon a proposed pension reform for 2025.
France's failure to change course over the years has gradually eroded the confidence of investors, who now demand a higher yield to buy French bonds than for similar Italian securities.
As a result, Paris is particularly vulnerable to a phenomenon affecting almost all European capitals, known as refinancing risk.
Most European countries have accumulated huge debts over the past 20 years, with periodic crises - such as the pandemic or the 2008 financial crisis - deepening the persistent deterioration of public finances caused by rising health care costs and pensions.
The eurozone's public debt ratio has risen from 66% of GDP in 2007 to just under 88% last year. The European Commission expects this ratio to continue to rise in the near future as budget deficits rise again under the pressure of the conflicts in Iran and Ukraine.
While the European Central Bank has kept interest rates close to zero - as it did from 2009 to 2022 - the cost of servicing this debt has remained affordable.
However, the situation has changed with the resurgence of high inflation. The ECB has already raised interest rates once this year after the conflicts in Iran and Ukraine led to higher oil and gas prices. David Rees, head of global economic analysis at Schroders, expects two more quarter-point hikes by the end of the year.
As a result, bonds that cost next to nothing to issue 10 years ago (even in 2022, investors were paying Germany to lend to it) now have to be refinanced at interest rates much closer to historical norms.
The French national statistics office INSEE predicts that Paris's debt service costs will more than quadruple this decade, from 30 billion euros in 2020 to 124 billion euros in 2030. This is money that could otherwise be used to finance new hospitals, the "green transition", rearmament or even tax cuts.
France is not the only country facing higher debt service costs at an inconvenient moment in its political cycle. Italian Prime Minister Giorgia Meloni and her Spanish counterpart Pedro Sanchez face elections next year, and voters in Finland, Greece, Estonia and Slovakia (as well as Poland, which is not part of the eurozone) will also head to the polls.
Households fear that high inflation caused by the conflict in Iran could melt away their real incomes
The debt service burden for Italy is much lower, as its new government bonds are not significantly more expensive than those issued a decade ago, when the country still bore the "stigma" of the sovereign debt crisis.
And while Sanchez has failed to pass a budget since 2022, rapid population growth, fueled by his liberal immigration regime, has boosted Spain’s gross domestic product (GDP) and ensures that there will be more people to shoulder the debt burden in the future. According to the European Commission, Spain’s debt is expected to fall below 100% of GDP again this year.
For now, the prevailing view is that Europe is still far from its own new debt crisis. The eurozone’s overall budget deficit is only half that of the United States, and the EU and the ECB have filled the most serious institutional and regulatory gaps that led to the sovereign debt crisis in 2010. No less important, recent reforms undertaken by the Friedrich Merz government in Germany should boost growth both there and across the EU, a view shared by Berenberg Bank’s chief economist Holger Schmieding.
But concern is growing – especially given the situation in France.
"There is a potentially large risk zone where a crisis could occur or not, depending on investor sentiment. Given our debt and deficit levels, we are probably already in that risk zone," Olivier Blanchard, a former chief economist at the International Monetary Fund, said last week.