European Governments Turn to Short-Term Debt as Borrowing Costs Rise
The increasing borrowing costs in Europe are forcing governments to opt for short-term debt, which may have significant implications for the region’s GDP growth. According to a Bryant University paper, a 10% increase in the government debt-to-GDP ratio can cost 30 basis points of GDP growth. With borrowing costs on the rise, European governments may see their debt ratios increase by 5-10% in the next 12-18 months, potentially trimming annual GDP growth by 0.4-0.7%.
The EU Commission forecast suggests that annual interest outlays may reach €9.9 billion in 2027, twice the initial forecast. This surge in interest costs can crowd out other fiscal spending, reducing quarterly GDP growth by 0.3-0.5%. The shift to short-term paper also raises rollover risk, potentially dampening private-sector confidence and aggregate demand.
The IMF has revised its 2025 real GDP growth forecast for the euro area from 1.7% to 1.3%, citing higher sovereign financing costs. This downgrade implies a 0.4% short-run drag on growth. Country-specific examples, such as Italy, also demonstrate the impact of rising borrowing costs on GDP growth.
Sources
- Bryant University: The Impact of Government Debt Levels on GDP Growth
- Bruegel: The rising cost of European Union borrowing and what to do about it749450_EN.pdf)
- S&P Global Ratings: Sovereign Debt 2025
- IMF: World Economic Outlook – Europe and Middle East