Chief Economist's Corner: Is a new debt crisis looming? Not in Denmark

Public debt has risen dramatically in many countries since the financial crisis, and even more so since the pandemic. But borrowing is no longer free. This could lead to serious problems in the years ahead – though fortunately not here at home.

A couple of years ago, I came across a few lines from Søren Kierkegaard's major work Either/Or from 1843, which I have since found difficult to shake.

They come from the chapter Crop Rotation, in which Kierkegaard philosophises about boredom and, in that context, touches on the finances of the state: "It is proposed to improve the finances of the state by means of savings. Can anything more tedious be imagined? Instead of increasing the national debt, they want to pay it off. As far as I know the political situation, it would be easy for Denmark to raise a loan of fifteen million (…). Let a loan then be raised; let it not be used to pay off the debt, but for public entertainment. Let us celebrate the millennium with feasting and merriment. Just as collection boxes are now placed everywhere for the deposit of money, so there should be bowls placed everywhere filled with money. Everything would be free (…) No one would be permitted to own property (…) What would be the consequence of this prosperity? All that is great would flock to Copenhagen – the greatest artists, actors and dancers. Copenhagen would become another Athens. What would be the consequence? All the wealthy would settle in this city (…) Oh, may my words reach the ears of those who are placed in high positions (…) Old Denmark is going to ruin, it is going to ruin through boredom – and that is the most fatal thing of all."

The passage is steeped in satire and irony, yet it illustrates a timeless truth about political debate. It is far more tempting to discuss how the state can spend more money than how the public finances can be brought into balance. And Kierkegaard's satire may be more relevant today than he himself could ever have imagined.

The massive fiscal stimulus packages during the financial crisis, and again during the pandemic, were largely necessary. But the bill has been passed on. The United States, the United Kingdom, France, Italy, Spain, Japan and China all carry public debt that today exceeds their annual gross domestic product. Their debt ratios thus lie far above the levels that economists traditionally regard as sustainable. Experience shows that when debt becomes too high, the risk of an unsustainable trajectory increases and confidence in the state's finances weakens. A stark example of this was seen during the Greek sovereign debt crisis just under fifteen years ago.

The problem has simultaneously grown larger because interest rates are no longer close to zero. Where borrowing could previously be done at virtually no cost, interest payments now represent an ever-growing burden on public budgets. At the same time, expenditure on defence, climate, healthcare and an ageing population continues to rise. In the United States, interest payments on the national debt have already become a larger budget item than the defence budget.

The consequence is that many countries risk entering the next downturn with considerably less fiscal room for manoeuvre than in previous recessions. If investors simultaneously lose confidence in economic policy, rising bond yields could quickly spread to the rest of the financial markets. That risk has grown as an increasing share of government bonds is held by investment funds, hedge funds and other non-bank financial institutions. As the BIS recently highlighted in its Annual Economic Report 2026, fiscal policy and financial stability are therefore more closely intertwined than ever before.

Fortunately, Denmark finds itself in an entirely different position. Following the serious imbalances of the 1970s and early 1980s, the fixed exchange rate policy, the 'potato cure' (the 1986 austerity package), budgetary discipline and subsequent structural reforms laid the foundation for a gradual recovery – one that means Denmark's public finances today rank among the strongest in the world.

It is nonetheless worth remembering that Denmark has not always enjoyed such sound public finances. In 1813 – the year Søren Kierkegaard was born, and which he himself later referred to as "the mad year of money" – Denmark effectively went bankrupt. Participation in the Napoleonic Wars on the French side had left the state with enormous unfunded expenditures and rampant inflation. The government was forced to carry out a monetary reform and establish the Rigsbank (National Bank) in order to restore confidence in the monetary system. The empty treasury had far-reaching consequences: Denmark was compelled to cease hostilities, and under the Treaty of Kiel in 1814, Norway was ceded to Sweden.

Kierkegaard's proposal to finance public entertainment with yet more debt was, of course, satire – but history reminds us that it is rarely free to leave the bill unpaid. That is precisely why discussions about budgetary discipline and sustainable public finances are often far more important than they sound. Savings may well be tedious. But the alternative could, in the end, prove far more dramatic.