In a February 2026 commentary in la Repubblica, Walter Galbiati noted that Italy’s public debt amounts to roughly €52,000 per citizen and warned of sustainability risks. The framing is rhetorical, but the anxiety it reflects is part of a broader shift. Across advanced economies, the debate over sovereign debt has re-taken centre stage.
In the US, federal interest payments are projected to absorb a growing share of fiscal revenues over the coming decade. Japan continues to manage debt above 250% of gross domestic product under yield-curve control constraints. In the UK and other G7 economies, consolidation debates have returned after the fiscal expansions of the pandemic era.
The advanced-economy dilemma
Within Europe, this tension is particularly pronounced. In October 2025, François Villeroy de Galhau, governor of the Banque de France, described France’s fiscal situation as one of ‘gradual suffocation’. Italy, with its burden shaped by decades of stagnant growth and structurally higher financing costs, faces an even more entrenched position.
The debt ratios in both countries exceed 110% and 135% of GDP, respectively, illustrating how escalating debt-service costs can increasingly constrict fiscal flexibility, even in large, advanced and fully market-integrated economies. While neither country is at risk of insolvency or impaired market access, the substantial resources committed to interest payments limit their ability to invest in essential areas such as infrastructure, digitalisation, energy transition, defence and other public goods.
In May 2025, Fabio Panetta, governor of the Banca d’Italia, stressed that reducing debt ratios requires both growth and credible consolidation. That dual requirement encapsulates the advanced-economy dilemma: consolidation without growth risks weakening demand and depressing output; weak growth, in turn, undermines consolidation efforts.
The broader issue is structural. During the post-2008 period, exceptionally low interest rates softened the constraints imposed by high debt stocks. In many cases, nominal growth exceeded effective borrowing costs, stabilising or even reducing debt ratios without fiscal tightening. That favourable interest-growth differential can no longer be assumed. As monetary policy normalises and risk premia fluctuate, debt dynamics become more sensitive to shocks and expectations. The arithmetic of debt sustainability is binding again.
The euro area as a magnified case
The euro area’s institutional design makes these tensions even more visible. Member states do not control monetary policy. They cannot devalue their currency or rely on national monetary financing. Adjustment therefore falls predominantly on fiscal contraction. Yet systemic risks are already partially mutualised ex post. If market access were threatened in a large member state, the Eurosystem would be compelled to intervene to protect monetary transmission and financial stability.
This asymmetry – decentralised fiscal responsibility combined with implicit crisis mutualisation – creates friction. Risk is shared but preventive instruments remain nationally constrained. High debt in France or Italy is therefore a European concern, not solely a domestic one. Moreover, when fiscal space tightens in large member states, investment in shared European priorities is curtailed.
However, the euro area’s constraint should be understood as a magnified case of a broader advanced-economy challenge: how to preserve fiscal space in a world where debt stocks are high and borrowing costs are no longer negligible.
A rules-based debt reset
One potential response lies in revisiting a proposal advanced a decade ago by Pierre Pâris and Charles Wyplosz: the Politically Acceptable Debt Restructuring in the Eurozone. Although conceived for the euro area, its underlying logic speaks to a more general question of sovereign balance-sheet management in mature economies.
The central idea is straightforward. A one-off, rules-based restructuring would restore fiscal space by converting a defined share of sovereign debt into perpetual, zero-coupon securities held indefinitely on central bank balance sheets. The share acquired would be calibrated to reduce participating countries’ debt ratios to a sustainable threshold – for example, 80% of GDP.
Operationally, the Eurosystem would purchase the designated portion of sovereign debt on the secondary market. In parallel, national central banks would issue interest-bearing notes to the market in equivalent amounts. Every euro of sovereign debt acquired would be matched by a euro of market-issued liabilities. The consolidated balance sheet would change in composition, not size. Monetary expansion would be avoided.
The cost of holding zero-coupon perpetuities would be recovered intertemporally. National central banks would retain future seigniorage income that would otherwise be remitted to treasuries, and the arrangement could include a predefined share of extraordinary fiscal revenues – such as privatisation proceeds or windfall receipts – to offset temporary income losses. The burden would therefore remain national and be amortised gradually over time.
The economic effect would be fiscal rather than monetary. By eliminating interest payments on the converted portion of debt, governments would face lower debt-service burdens and reduced refinancing risk. Debt ratios would decline mechanically to the targeted threshold. No losses would be imposed on private creditors. No cross-country fiscal transfers would be required.
Legal considerations
From a legal standpoint within the euro area, the framework can be designed to remain consistent with Article 123’s prohibition on direct monetary financing, as purchases would take place on the secondary market and be matched by the issuance of marketable interest-bearing securities by national central banks. The arrangement can also be structured to respect existing proportionality principles within the Eurosystem.
Central banks are uniquely positioned to undertake these intertemporal operations. Unlike private investors, they are not subject to liquidity constraints and can operate with lower profitability for extended periods. Future seigniorage flows and retained earnings provide long-horizon buffers.
To mitigate moral hazard, participation would be conditional and rules-based. Governments would commit to credible medium-term fiscal frameworks and to allocating restored fiscal space towards growth-enhancing expenditure. Safeguard mechanisms would provide for the automatic reconversion of a proportional share of the converted zero-coupon holdings into standard market-rate sovereign debt if agreed fiscal thresholds were breached, thereby reinstating debt-service obligations and restoring fiscal pressure.
Why the debate matters beyond Europe
The relevance of this discussion extends beyond the euro area. The core issue is not whether France or Italy are exceptional, but whether advanced economies can sustain high debt stocks in a structurally higher-rate environment without progressively eroding fiscal capacity and policy coordination. In a world of tighter monetary conditions, demographic pressures and rising geopolitical spending demands, the margin for fiscal complacency has narrowed.
A rules-based debt reset in Europe would therefore serve as a test case. It would demonstrate whether an advanced monetary system can proactively realign sovereign balance sheets without triggering financial instability, inflationary pressures or legal conflict. It would convert implicit crisis management into explicit, rules-governed adjustment.
Crucially, the operation would be exceptional. It would apply only once, calibrated to restore debt to a sustainable threshold, and would not constitute a standing mechanism for future deficits. Countries benefitting from the reset would remain fully subject to fiscal rules and market discipline. The objective is to re-anchor sustainability, not to dilute it.
Such an approach would not relax discipline. It would make sustainability operational rather than aspirational. By aligning debt stocks with plausible growth paths and institutional capacities, it would restore the conditions under which fiscal and monetary policy can coordinate effectively.
Europe has the institutional framework to attempt such a recalibration. Whether it does so will offer lessons for advanced economies more broadly on how to recover fiscal space without sacrificing credibility.
The debate over Europe’s debt architecture may thus prove decisive not only for the euro area, but for how advanced economies more broadly confront the constraints of a higher-rate world.
Biagio Bossone is an adviser to international financial institutions and national central banks.
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