Borrowing Costs Rise Across Europe, Threatening Spending Plans

Europe's economy is facing a squeeze as borrowing costs rise across the bloc, making it harder for governments to finance their spending plans. France will spend around six percent of its government revenue servicing old debt, up from three percent in 2019.

The increase in borrowing costs is not just due to governments borrowing more money. The Iran war has pushed energy prices up and eurozone inflation to 3.3 percent in August, its highest in nearly three years. This has led bond buyers to demand a higher return, which has contributed to the rise in borrowing costs.

The European Central Bank (ECB) has also stopped reinvesting its bond holdings, leaving markets to absorb roughly €384bn more this year. ECB chief economist Isabel Schnabel estimates that this has already added around 0.6 percentage points to euro-area borrowing costs.