Hedgeye contributor and Spanish economist Daniel Lacalle argues that the US's $40 trillion debt has made headlines. However, the key to fiscal policy isn't who "wins," but who "loses" first. According to official estimates for 2026, the present value of the funding gap for US Social Security and Medicare over 75 years is approximately $95 trillion, roughly 5% of the cumulative present value of projected GDP during that period. This doesn't include publicly held federal debt, which is projected to reach 101% of annual GDP by 2026. However, the Eurozone's implicit fiscal burden is at least as large as its on-paper debt. Official estimates from the European Commission show that, considering future contributions, net accrued public pension liabilities are approximately 150% of GDP, while total pension commitments are approximately 371% of GDP. Importantly, this doesn't include the pressure from most future healthcare and long-term care spending. This means the next debt crisis may not originate in the US, but rather in the Eurozone.
First, the US dollar remains the world's reserve currency, and US Treasury bonds remain the most important asset for central banks globally, despite recent gold purchases and asset rebalancing trends. Secondly, the political reality in most major EU economies is fiscal aversion. French sovereign bond yields are now higher than Italian yields. No eurozone government is willing to cut spending or limit future debt. Unfunded committed debt (debt committed but not yet issued) in major eurozone countries exceeds 300% of GDP. Thirdly, eurozone sovereign assets have generated negative real economic returns since 2021, leading to decreased global investor interest.
While US debt is indeed a challenge, the eurozone debt problem is greater because the reported debt only reflects the figure under the "excess deficit agreement," not the total debt of the public sector.
Investors should be more wary of a region mired in economic stagnation, with expanding government size and a simultaneous increase in unfunded debt.
The recent global bond sell-off is not a temporary problem. Markets are telling governments that no central bank can anymore cover up their irresponsibility. Developed economy governments have pushed the boundaries of debt-driven policies to the limit, exceeding their fiscal, economic, and inflationary thresholds.
The US bond market is making headlines because US Treasury yields remain the benchmark for global currency prices and collateral, but the Eurozone could trigger the next major sovereign shock because EU member states are borrowing in currencies they cannot control, and governments are refusing to cut spending, resorting instead to tax increases and regulatory burdens that are further weakening their economies.
