Can Advanced Economies Avoid Debt Distress

Historical precedents

While the US and several other advanced economies are unlikely to make fiscal adjustments needed to stabilize debt in the medium term, they may try later. To see how likely this is, we looked at historical precedents: how often countries achieved the required primary balance, the longest period balance was maintained, and how often they made the needed adjustment within seven years.

Our results show that primary balances at the level needed to stabilize debt in several high-debt advanced economies-and the large adjustments needed to get there from current fiscal positions-are rare. France, for example, would need a primary surplus of 1.3 percent of GDP to stabilize its debt, which has happened only six times in five decades. This does not mean such adjustments are impossible, but history suggests it will be difficult and likely to take longer than the seven years EU fiscal rules envisage.

Policymakers in these economies can take heart from the transformation of what were once considered the euro area ' s weakest links. In 2024, Greece posted a primary balance of 4.0 percent, adjusted for swings in the business cycle-well above what is needed to stabilize debt. Portugal needs only a minor adjustment of 0.5 percent of GDP; Ireland ' s required adjustment of 1.9 percent is modest, and the country ' s debt ratio is exceptionally low, at 39 percent of GDP, far below 122 percent in the US and the UK ' s 101 percent.

How did countries that faced severe fiscal crises 15 years ago become examples of discipline today? After the 2008 global financial crisis, financial markets drove them to the edge of collapse, forcing them to accept EU/IMF lending programs. Despite design flaws , these programs' essential fiscal tightening and structural reforms put their economies back on track for sustainable growth. The adjustment was painful and, in the case of Greece, very long-lasting, but it was eventually effective.

The results speak for themselves. With average annual growth between 3.1 percent and 4.2 percent in 2022-25, all three countries exceeded the US pace of 2.6 percent.

The lesson: Fiscal discipline and structural reforms-along with public and private debt restructuring when debt is unsustainable-pay off eventually. Not surprisingly, these reforms and restructurings did not stem from domestic political momentum but were forced on them by market pressure.

Recognize the risks

The question is, How will countries adjust this time? We see several possibilities.

The best outcome would combine growth-enhancing reform-including by implementing the Draghi report ' s single-market agenda in the EU-with deep reforms to social security and pension systems. It could also include overhaul of tax systems to raise revenue without discouraging growth. The latter is particularly true for the US-the only Organisation for Economic Co-operation and Development country without a value-added tax.

Unfortunately, this outcome is also politically the most difficult. A more likely path to fiscal consolidation involves a shift in domestic political leadership that prioritize fiscal discipline but not necessarily deep reform. Italy offers an example. Scarred by near disaster in the early 2010s, Italian governments across the political spectrum have kept budgets broadly under control. Italy ' s debt ratio of roughly 135 percent of GDP is still high, but its cyclically adjusted primary balance of 0.3 percent of GDP looks far healthier than those of Belgium, France, or the UK.

A hard-landing scenario could be triggered by a sudden spike in borrowing costs, leading to debt distress. As debt rises, interest rates could also climb, and markets might become more sensitive to news that calls fiscal sustainability into question. Governments might attempt forms of financial repression-for example, encouraging domestic banks or institutions to absorb additional government debt-but such measures have limits. Surprise inflation could temporarily ease fiscal pressures, but persistently higher inflation would eventually drive up nominal interest rates.

Let's hope that policymakers recognize these risks and act early enough to prevent such an outcome.