Debt and an oversized state: The real threat to Western democracies

Global debt has reached staggering figures, totaling more than $300 trillion in 2024. Most of this debt is concentrated in the older, industrialized democracies, as well as China. It comprises public sector (sovereign) debt, corporate borrowings and household liabilities. Collectively, it represents roughly 300 percent of the world’s gross domestic product.

In 2024, the total amount of public and corporate debt traded exclusively on the bond market – excluding direct loans from financial institutions – reached an astonishing $100 trillion. Notably, 40 percent of this debt will mature by 2027, requiring either refinancing or repayment. Last year alone, sovereign and corporate borrowing amounted to $25 trillion. Given the scale of these borrowings, the bond markets play a crucial role in financing government activities.

Corporate debt can be a cause for concern, however, the private sector has established clear rules for eligibility and criteria for repayment and refinancing. In contrast, such standards are absent from public finances in most countries.

The credit rating of the United States, the world’s largest economy, was recently downgraded by Moody’s Investors Service. This will affect the U.S. Treasury bond, a cornerstone of the global bond market. The downgrade will complicate refinancing efforts, increasing costs at a time when debt management is already strained.

For many countries, especially those with large economies, debt servicing has become one of the most important budget expenses, if not the largest. When the U.S. needed to refinance a substantial portion of its debt, President Donald Trump quickly shifted his stance on what he referred to as “Liberation Day.” He realized that the threat of tariffs was affecting the bond market, potentially making refinancing more expensive. This shift was in addition to his strategy of pushing other countries to come to the negotiating table.

For many countries, especially those with large economies, debt servicing has become one of the most important budget expenses, if not the largest.

 

The debt crisis is not limited to the U.S., it is also a pressing issue in China and Japan, and it creates a unique set of challenges in Europe. All countries continue to overspend irresponsibly. Democracies have become dysfunctional as parliaments overlook their primary responsibility of controlling government expenditures.

Europe’s debt crisis

There has long been a clear rule in the eurozone that sovereign debt is the responsibility of each member country and there is a strict no-bailout policy. However, overspending, driven by bloated governments across the continent, has become widespread. For a long time, the eurozone benefited from the illusion of low German debt. This overlooked the reality that Germany, through similar populist policies, faced equally bloated state budgets while managing to present a better debt situation by neglecting key investments in infrastructure and education. Across Europe, the implicit costs of retirement and health care for a rapidly aging population remain unaccounted for – a practice that would be considered fraudulent in the private sector.

Some of Europe’s largest economies, such as France, are close to insolvency, and refinancing has become a significant challenge. An increasingly vocal movement now advocates shifting member states’ sovereign debts to the European Union level. This could provide short-term relief but would exacerbate the problem in the long term by rewarding overspending. This might delay the crisis but would likely worsen the outcome.

The situation in Europe clearly demonstrates a lack of responsible leadership in political, economic and monetary matters. It certainly does not reflect well on many “elite” economists, who tend to downplay the crisis. The result will be a drastic loss of prosperity.

The situation in Europe clearly demonstrates a lack of responsible leadership in political, economic and monetary matters.

 

Germany introduced a constitutional “debt brake” (Schuldenbremse) in 2009 to keep borrowing in check. In a democratically questionable move, the outgoing parliament, which was replaced in February 2025, dissolved the debt brake to allow the new government to increase indebtedness. This included funding for essential defense spending, 500 billion euros for infrastructure and 100 billion euros for the green economy. The green economy allocation was an expedient concession to secure the Green Party’s support alongside the Christian Democrats (CDU) and Social Democrats (SPD). There is, however, a glimmer of hope: The newly appointed SPD Finance Minister, Lars Klingbeil, plans to finance the infrastructure investment through savings in other areas. A promising trend if he succeeds, but it is still not enough.

Nevertheless, Germany alone cannot resolve the crisis, and unfortunately, the prospect of a common European debt may become a reality.

The toxic threat to global economic stability

It is cynical, but the likely political path forward involves triggering significant inflation. Raising taxes is not a viable solution, as citizens and economies are already overburdened. The Organisation for Economic Co-operation and Development’s proposals for a global wealth tax and increased inheritance taxes would essentially kill the goose that lays the golden egg. The theory, heavily supported by the World Economic Forum, nongovernmental organizations and many economists, that inequality is the primary cause of economic stagnation lacks substance. Sustainable prosperity for all can only be achieved by boosting productivity. A large public sector, excessive debt and inflation are toxic to economic health.

It is doubtful that any self-labelled liberal democracy can withstand such an inflationary shock. Much attention is given to threats to democracy from autocrats such as those in Russia, which is legitimate. Strangely, even the U.S. president is seen as a danger, as are populists. However, those leaders who recklessly expand the size of the government and offer excessive welfare benefits to win votes are often at the forefront of undermining freedom and civil society. To maintain a free society, we must return to the core responsibilities of government: ensuring the security and prosperity of the people, as well as safeguarding the freedoms and self-responsibility of the community.

Politicians lack the courage to address the situation honestly. Acknowledging the failed policies of recent decades and drastically reducing regulations and the size of the public sector are indispensable steps. The public will only support such measures if they recognize the full extent of the disaster caused by appeasement politics and partisan power grabs in democracies.

Vladimir Lenin stated that “the capitalists will sell us the rope with which to hang them.” At present, however, Western democracies are not waiting for that to happen. Instead, their neglect of sound principles and the values of a free society is leading them to hang themselves.