A report by the European Stability Mechanism (ESM) points to the prospect of a further reduction in Greek debt, even under unfavorable international conditions, highlighting the extent of the fiscal adjustment achieved in recent years.
The report, titled Euro Area Stability Watch, assesses macroeconomic and financial risks for the euro area and their impact on member-states’ fiscal positions and sovereign bond markets. The assessment is based on an adverse scenario prepared by the ESM, which envisages a new escalation of tensions in the Middle East and higher energy prices, combined with a significant decline in US stock and bond prices, which would also result in losses for European investors.
Each of these two shocks would, on its own, pose a significant challenge, but together they would push the euro area economy into recession, with GDP declining by 0.4% in 2027, while inflation would rise close to 5% (averaging 3.4% in 2027).
Under this adverse scenario, and assuming no policy changes, public debt would increase in all euro area countries by 2035, with the exception of Greece and Cyprus, where it would decline. The increase in euro area public debt would be around 20 percentage points higher than under the ESM’s baseline scenario, which is aligned with the European Commission’s latest economic forecasts.
