We are living in turbulent times that are shifting the economic center of gravity, demanding significant adaptability from economic policymakers. Unexpected events continue to unfold, and nations must retain room to maneuver through successive shocks. A key indicator of a country’s ability to act is the cost of debt financing, reflected in the yield markets demand to purchase government bonds. When this cost spikes, as it did during the financial crisis, governments lose functional autonomy and are forced into painful adjustments. Conversely, during the pandemic or after the outbreak of the Ukraine war, public treasuries comfortably accessed markets to finance economic and social spending, aiding recovery. Over the past three years, the yield on the 10-year US Treasury bond, a global benchmark, has more than doubled to nearly 4.5%. The trend is similar in Europe, though yields remain lower: around 3.1% in Spain and 2.5% in Germany. This increased yield may reflect expectations of future interest rate hikes by central banks to control inflation. However, in Europe, inflation appears under control, as indicated by both figures and market behavior. In the US, tariff impositions have pressured prices, but this doesn’t fully explain rising debt costs. The real reason lies in waning market confidence in public finance sustainability. Amid uncertainties, investors prefer liquidity or short-term debt like Treasury bills. Additionally, states increasingly depend on markets to finance budget deficits as central banks reduce their bond holdings. The IMF predicts a 30% rise in advanced economies’ liabilities by 2030, pushing the debt-to-GDP ratio to 113%. These forecasts don’t fully account for Trump’s proposed tax cuts or European defense spending plans, which could worsen deficits further. Spain’s strong economic growth and inflation have helped contain fiscal slippage, even with extended budgets, as reflected in its reduced risk premium. However, trade wars threaten to weaken this expansion, eroding revenue bases while countries compete to issue growing debt volumes. A new fiscal strategy is essential to preserve Spain’s economic sovereignty.
— new from EL PAÍS
