ECB warns high sovereign debt could stifle growth

European Central Bank (ECB) Vice President Luis de Guindos warned on Monday that high levels of sovereign debt could hinder governments’ ability to tackle long-term economic challenges, potentially leading to low growth.

Speaking at Euro Finance Week in Frankfurt, Guindos highlighted that growing primary budget deficits could limit spending on critical issues like climate change, defence, digitalisation, and productivity improvements.

He also cautioned that fiscal slippage could result in a further repricing of sovereign risk, making it harder for governments to respond to adverse economic shocks. His remarks came ahead of the ECB’s upcoming Financial Stability Review, which will assess rising risks to the banking sector.

Guindos noted that macroeconomic risks have shifted from high inflation to concerns over economic growth, with inflation now closer to the ECB’s 2 per cent target. The ECB is expected to announce a fourth quarter-point reduction in its deposit rate at its December meeting, with future monetary policy direction still uncertain.