The US $40 trillion debt has dominated global headlines. However, although the US fiscal challenges are relevant, we must remember an important lesson. Fiscal policy is not about who wins but who loses first.

According to official 2026 estimates, the present value of U.S. Social Security and Medicare financing gaps is about $95 trillion over 75 years, roughly 5% of the cumulative present value of projected GDP over that period, on top of federal debt held by the public, which is already projected at 101% of annual GDP in 2026.

However, the euro area’s hidden fiscal burden is at least as large as its recorded debt. Official European Commission estimates put net accrued public-pension liabilities at around 150% of GDP, after future contributions are considered, while gross pension promises amount to roughly 371% of GDP. Importantly, this excludes much of the future pressure from health and long-term care spending.

What does this all mean? The next debt crisis may not come from the U.S. but from the eurozone. First, the U.S. dollar remains the world reserve currency and treasuries are the most important asset for central banks globally, even with the recent gold purchases and rebalancing. Second, the political landscape in most large European Union economies is one of fiscal denial. France’s sovereign bond yields are now higher than Italy’s. No eurozone government is willing to cut spending or limit future liabilities. Unfinanced committed liabilities (debt already assumed but not issued) exceed 300% of GDP in key euro area nations. Third, euro area sovereign assets have generated negative real economic returns since 2021, leading to a declining appetite from global investors. U.S. debt is a challenge, but euro area debt is significantly more problematic because the reported debt is only the “excessive deficit protocol” figure, not the total liabilities of public administrations.

Euro-area Maastricht debt captures only consolidated currency and deposits, loans, and debt securities at face value. It is therefore materially smaller than the full balance-sheet liabilities of public administration and narrower still than the euro area’s implicit pension and public sector-related commitments.

The key lesson is that investors should be rightly concerned about issued debt, but they should be even more scared of expanding government size added to unfunded liabilities in a region crippled by economic stagnation.

All of this tells us that the recent global bond sell-off is not a temporary issue. Markets are telling  governments that no central bank is going to hide their irresponsibility anymore.

Developed economies’ governments have pushed all the limits of debt-funded policies and surpassed their fiscal, economic, and inflationary limits.

Fiscal limit: More spending creates persistent deficits, and tax hikes never solve the issue. Government spending is a burden on taxpayers and the economy.

Economic limit: More government spending and bloating GDP with debt-fueled public sector outlays only weakens the economy and productive investment, leading to stagnation.

Inflationary limit: Government spending leads to persistent inflation and markets discount higher-for-longer consumer prices, eroding the economy while the combination of higher taxes and consumer prices demolishes the middle class.

The United States creates headlines because Treasury yields remain the global benchmark for the price of money and collateral, but the euro area may generate the next big sovereign shock because its member states borrow in a currency they do not control and governments refuse to reduce spending, resorting constantly to tax hikes and regulatory burdens that make the economy weaker.

As of 21 August 2026, the U.S. 30-year Treasury yield traded at 5.27% and the 10-year Treasury yield around 4.73% after a week of sharp moves that briefly pushed long-dated yields to their highest levels since 2007. However, if the world saw the U.S. as a risk and other nations as safe havens, German bond yields would be falling, as happened in other periods of risk aversion. That is not the case. Germany’s 10-year Bund has soared to 3.26%, the UK 10-year yield is at a record 5.1%, and Japan’s 10-year yield is near 2.89%, confirming that the repricing is global rather than U.S.-centric.

This is what matters for investors and governments. Long-term sovereign bonds are no longer the unquestioned safe assets. That is why gold is soaring too.

Long-term bonds are being repriced for inflation risk, fiscal deterioration, high debt supply, and the inability of central banks to disguise fiscal irresponsibility.

When the U.S. 10-year and 30-year yields rise, financing conditions tighten globally through mortgages, corporate credit, bank funding, and emerging-market borrowing costs. In this environment, the market is not moving to euro area debt for protection; it is moving away from it.

The United States retains the world reserve currency and has the deepest and most liquid sovereign bond market in the world. This does not eliminate the debt problem, but it changes its transmission. Furthermore, at least the United States government is keeping federal spending under control, although not cutting it as fast as desired. That is not the case in the euro area, where none of the large economies seem to have any intention to control spending; rather, the opposite. Thus, this adds to the pressure of unfunded liabilities.

The euro is the only global currency that faces re-denomination risk, and the fiscal policy of the euro area has opted for interventionism and government control rather than free markets. The ECB centralizes monetary policy in the euro area, yet governments spend and borrow as if they possess unlimited monetary credibility. Their only fiscal tool is higher taxes. This creates the risk that what begins as a liquidity event quickly becomes a solvency concern, especially when markets doubt whether Brussels, Frankfurt, and national governments will respond with a coherent strategy. We saw it in 2011.

Now, the euro area has added more risks. The “savings and banking union” and central bank digital currency (CBDC) projects do not provide relief for global investors; rather, they raise concerns that the euro area may have opted for interventionism and government control by imposing the use of the currency instead of enhancing its appeal as a global hub for free markets and capital attraction.

The savings and banking union project will not avoid a debt crisis in the euro area. With governments that do not accept spending cuts, the digital currency may only lead to surveillance, control, and, ultimately, higher inflation.

This is why the next crisis may come from Europe, not despite the U.S. debt problem but because the euro area lacks institutional flexibility, discipline, and an open market approach. Thus, if the euro area accelerates its interventionist plans to force investment and promote the use of the currency through repression, the problem may become more significant. If monetary policy cannot be a limit to fiscal irresponsibility and governments refuse to reduce their spending, the currency and the financial system are at risk. Resolving the United States’ debt problem requires implementing spending cuts and fostering higher productive growth. Unfortunately, euro area governments are not generating economic growth and are instead increasing government intervention. As such, when confidence in a large member state disappears, the consequences are systemic for the entire monetary union.

The world is seeing the German spending experiment fail in real time, and that is why German bonds are falling as fast as others, instead of strengthening.

Recent data from France and Germany show that the problem extends beyond a small country within the union. The core of the euro area is weakening while the peripheral countries are either disguising stagnation with immigration and political spending (Spain) or are still in post-crisis mode.

France’s 10-year yield has soared to levels not seen since 2008. German bonds, once viewed as a safe haven, weakened alongside other euro area issuers. The ECB anti-fragmentation tool disguised imbalances for a while and now has transferred the risk to all sovereign issuers.

France matters because it is the core euro-area economy alongside Germany. French public debt is expected to be about 118% of GDP in 2026 and could rise toward 130% of GDP by 2030. Markets now understand that no new prime minister is going to cut spending. They will repeat the same failed approach of the past three decades: raising taxes and postponing necessary spending cuts.

 As markets begin to reprice France as a fiscal weak link rather than a core strength, the euro area’s internal problems become impossible to ignore. This European project has made rising government spending and a large public sector the focus of policy, treating the private sector as a cash machine for an ever-expanding bureaucracy.

The real problem is not simply the absolute level of debt. The combination of high borrowing, big government, high taxes, and a lack of real growth capacity leads to rising interest costs, and it is now evident that central banks can no longer disguise this problem.

When U.S. borrowing costs rise, global financial conditions tighten. It is a significant problem that requires spending cuts, government shutdowns, and higher private sector growth. When euro area borrowing costs soar, they show evidence of the unsustainability of a European project based on expanding the size of government at any cost. When governments reject short-term pain, they pass it to citizens.

The solution is not more government, monetization, intervention, or more taxes on productive capital. The answer is credible spending cuts, lower structural deficits, stronger incentives for private investment, and reforms that eliminate regulatory burdens and lift productivity as well as economic growth. If nothing changes, U.S. debt will continue to tighten global financial conditions, but the euro area may still be the place where the next sovereign crisis erupts.