The global landscape of public debt is under significant strain as major economies announce substantial debt issuance in response to fiscal pressures and geopolitical tensions.

The European Commission, with the support of France and Germany, has unveiled a defense rearmament program worth €800 billion.

In addition to this, Germany plans to allocate half a trillion euros toward infrastructure and decarbonization investments.

Concurrently, former U.S. President Donald Trump has indicated plans to renew the tax cuts from his first term, which could lead to a projected revenue loss of $4.5 trillion over the next decade, further exacerbating Washington's budget deficit, particularly under a continued tariff policy that negatively impacts the economy and public finances.

Meanwhile, China is introducing new economic stimuli to counter the fallout from its real estate credit bubble.

According to estimates from the OECD, global borrowing needs are set to exceed $17 trillion in 2023, approximately one-quarter of the GDP for advanced economies.

This figure marks a 21% increase compared to two years ago, placing intensive pressure on state financing conditions.

Investors are now demanding higher yields on government debt, exemplified by a half-percentage point increase in the yield of Spanish bonds and a comparable rise in German bonds over the past three months, despite the European Central Bank's ongoing monetary loosening.

The impact of Trump's economic policies on interest rates presents a complex scenario as investors shift from equities to public debt in fear of recession, contributing to volatility in interest rates in the U.S. compared to Europe.

The rising financial costs raise questions about debt sustainability.

Under European regulations, a declining debt-to-GDP ratio should be maintained, aiming for a target of 60%.

However, these fiscal objectives have diminished in importance, with Brussels implicitly acknowledging that existing fiscal rules may not apply in the context of accelerated rearmament.

The effectiveness of fiscal stimuli in boosting economies remains pivotal.

Given the current economic imbalances and interest rates, expected growth of around 1% for the European economy this year (in the best-case scenario) would lead to a corresponding rise in public debt relative to GDP. Such a situation could stress financial markets, potentially spiraling into increasing debt and financial costs, even if the ECB reduces interest rates as desired.

In Spain, the economic conditions present a more favorable outlook.

Nevertheless, maintaining a debt-to-GDP stability relies on sustaining a growth rate around 2%, or implementing a budgetary adjustment that accommodates rising defense spending.

This sustainability criterion is expected to be met this year due to strong domestic consumption, with employment continuing to grow—partly due to immigration—while many households leverage savings to sustain spending, offsetting declines in exports and the uncertainties caused by protectionist threats.

In the wake of the pandemic, the European Union has markedly increased its collective debt issuance.

As of now, the outstanding balance of bonds and bills issued by the Commission has reached approximately €650 billion, thirteen times the level from five years ago.

In 2023 alone, new issuances have totaled €62 billion, with Brussels announcing plans that signal significant increases in financing needs.

The risk premium on collective debt is now nearing levels comparable to that of Spanish debt.

This backdrop highlights the ongoing challenges and adjustments facing major economies as they navigate a complex financial landscape influenced by both internal and external pressures.