Rising interest costs are increasingly becoming a heavy burden for EU member states. According to reporting by Spiegel, Italy’s national debt currently stands at 137 percent of its annual economic output. Calculations provided by FDP MEP Moritz Körner, based on data from the EU statistical agency Eurostat, showed that state interest payments accounted for 3.9 percent of Italian Gross Domestic Product last year.
In Greece and Hungary, the state interest burden surpassed three percent of economic output. Germany registered a relatively solid rate at 1.1 percent, though increased public spending for defense and infrastructure initiatives means that interest expenses are expected to climb domestically as well.
The situation is set to worsen should the European Central Bank (ECB) raise key interest rates in response to energy price shocks, as this would make taking on new loans even more expensive. Market anxiety over inflation is already growing, prompting investors to increasingly sell government bonds. This action pushes down the bonds’ prices but drives up the yields. Even the yield on German ten-year federal bonds is now nearly three percent annually, which is the highest level since 2010.
Körner’s analysis reveals that a substantial portion of the new public borrowing throughout the EU is now being consumed solely by interest payments. In fact, the Italian state paid more interest in the last year than it borrowed in new debt. This creates a vicious cycle where the cost of interest necessitates further borrowing, leaving little room for crucial investments in areas like infrastructure, education, or innovation-all of which are vital for fostering future growth and increasing tax revenue. Furthermore, many bonds that are maturing now were originally issued during the low-interest-rate era and must now be replaced with new bonds at significantly higher interest rates.
The FDP deputy fears that the ECB could face pressure due to this debt spiral and might be compelled to take greater consideration of heavily indebted nations. However, Körner warns that if the ECB avoids raising interest rates as a consequence, inflation could erode private savings. He urged governments to prioritize and implement austerity measures.
“If the EU states fail to reform their budgets, an economic scenario of stagflation, weak investment, and monetary policy paralysis will no longer be avoidable” the liberal politician warned. This view aligns with long-standing statements from ECB President Christine Lagarde, who has maintained that the responsibility for fiscal health lies with national politics, not the ECB.
