F&D Magazine. Stabilizing Debt in Advanced Economies
This article by Zsolt Darvas and Jeromin Zettelmeyer examines whether advanced economies can stabilize rising public debt levels. It focuses on long-term fiscal sustainability and the adjustments required to prevent debt distress. The authors argue that, although many countries still retain borrowing capacity, financial conditions are tightening. As a result, governments must shift toward fiscal discipline and structural reforms to ensure stability.
Rising debt and market sensitivity
Highly indebted advanced economies face a deteriorating fiscal outlook. Under current policies, debt ratios in countries such as France, the United Kingdom, and the United States are expected to increase over the next two decades.
So far, financial markets have remained relatively tolerant. However, recent volatility suggests that this tolerance may not persist. Investors could begin to demand higher interest rates in response to fiscal risks. Consequently, debt stabilization may become more difficult as borrowing costs rise.
At the same time, structural forces complicate the outlook. Population aging and weaker growth prospects put upward pressure on debt ratios. Although productivity gains driven by artificial intelligence could help, their timing and magnitude remain uncertain.
Fiscal adjustment requirements
To assess sustainability, the authors estimate the fiscal adjustments needed to stabilize debt over a 20-year horizon. Their framework assumes that governments improve primary balances within seven years and then maintain them over time.
The results present a mixed picture. On one hand, the long-term primary balances required for stabilization appear moderate. For example, France and the United States would need primary surpluses of about 1.3 percent of GDP. On the other hand, current deficits imply that reaching these targets requires significant adjustments. Several countries must improve their fiscal position by more than 3 percent of GDP, and some require adjustments closer to 5 percent.
Moreover, official fiscal plans often rely on optimistic assumptions. If growth or inflation underperforms, debt trajectories could worsen. Therefore, achieving stabilization depends not only on policy commitments but also on realistic macroeconomic expectations.
Historical evidence and feasibility
The authors examine historical precedents to evaluate how realistic these adjustments are. Their findings suggest that sustained primary surpluses at the required levels are rare. For instance, France has achieved the necessary surplus only a few times over several decades.
Nevertheless, some countries provide encouraging examples. Greece, Portugal, and Ireland improved their fiscal positions significantly after the global financial crisis. These adjustments were driven by a combination of fiscal consolidation, structural reforms, and external pressure. Although the process was difficult and prolonged, it ultimately supported stronger economic growth.
This evidence indicates that adjustment is possible, but it often requires strong incentives and sustained commitment. In many cases, market pressure rather than domestic political momentum has driven reform.
Policy paths and risks
Looking ahead, the authors outline several possible adjustment paths. The most favorable scenario combines structural reforms with growth-enhancing policies. These include pension reforms, tax system improvements, and measures to increase productivity. However, this approach is politically challenging.
A more likely scenario involves gradual fiscal consolidation without deep structural changes. While this path may stabilize debt, it could limit long-term growth potential.
Finally, a more adverse outcome involves a sudden increase in borrowing costs. Such a shock could trigger debt distress and force abrupt adjustments. Governments might attempt temporary measures such as financial repression or tolerating higher inflation. However, these strategies have clear limits and may create additional risks.
Reference
Darvas, Z., & Zettelmeyer, J. (2026, March). Can advanced economies avoid debt distress? Finance & Development, International Monetary Fund. https://www.imf.org/en/publications/fandd/issues/2026/03/stabilizing-debt-in-advanced-economies-zsolt-darvas