Several of Europe’s heavily indebted governments are facing a challenging year as they grapple with the reality of reducing borrowing while contending with political constraints. After years of unrestricted spending during the pandemic and soaring energy costs, 2024 was anticipated as a turning point for repairing public finances across countries like France and the UK.

However, despite efforts to curb deficits by phasing out energy subsidies, the persistence of new and existing financial commitments, coupled with the impact of rising interest rates, threatens to keep national debt levels elevated or even increasing in many areas. Italy, for instance, may soon see its borrowings surpass 140% of its GDP once more.

This predicament leaves certain governments in a bind: they must either risk displeasing voters by implementing spending cuts or tax hikes or face the scrutiny of investors for their lack of action. The added complications of politically sensitive events, such as elections for the European Parliament and potentially for Westminster in the UK, further exacerbate the challenge.

Famke Krumbmüller, EMEIA leader of geostrategy at EY, remarked, “The economic situation in Europe right now is already very prone to nourishing populist rhetoric. When these countries go into an additional round of fiscal consolidation, that will just further increase the dynamic.”

Pressure on the region’s weaker public finances is mounting, with Fitch Ratings recently expressing skepticism about France’s ability to meet its deficit reduction targets. The International Monetary Fund’s latest forecasts paint a stark picture, with France, Italy, and the UK all expected to accumulate more debt despite narrowing deficits.

While factors such as higher interest costs and sluggish growth contribute to the worsening financial outlook, policy decisions also play a crucial role. Italy, for example, grapples with the fiscal legacy of pandemic-era tax breaks, while France’s President Macron faces opposition to deeper spending cuts due to political considerations.

Across the EU, the rise of far-right parties adds pressure to soften the blow of spending cuts, mirroring challenges faced by the Conservative government in the UK ahead of a looming general election.

However, there may be room for action once these political hurdles are cleared. Italy’s economic forecasts, for instance, may not fully account for potential legislative measures aimed at fiscal repair.

Yet, the broader challenge lies in the lack of consensus among citizens about the necessity of budgetary restraint. The top priorities for voters, as per the European Commission’s Eurobarometer survey, revolve around combating poverty and supporting the economy, often requiring financial investments.

As Europe’s leaders navigate these complexities, they benefit from favorable conditions in financial markets, albeit temporarily. However, long-term pressures, including defense spending, the green transition, and aging populations, continue to strain public finances and political cohesion.

Macron’s recent call for a reevaluation of EU rules underscores the growing tension, while the European Commission faces the delicate task of enforcing fiscal discipline without stifling growth.

The lessons learned from the sovereign debt crisis of the past decade highlight the delicate balance between fiscal responsibility and economic growth. Allianz economists warn that excessive austerity measures could hinder Europe’s already fragile economic recovery, especially in light of global uncertainties.