Whilst the European economic debate often remains bogged down in budgetary constraints, deficit-to-GDP ratios and rigid stability criteria, a completely different financial game has been playing out for years across the Atlantic and in the Far East.

Over the past two decades, the dominant narrative among international analysts and observers has painted a clear divide. On the one hand, there has been the supposed stagnation of the ‘Old’ Continent, shackled by its own fiscal rules; on the other, the overwhelming dynamism of the United States and China has been celebrated – superpowers capable of churning out cutting-edge technological innovation, colossal infrastructure projects, widespread industrial subsidies and enviable rates of economic growth.

However, there is one fundamental detail that is all too often omitted or downplayed in this superficial comparison: this extraordinary acceleration is not the result of a structural miracle, but rather a phenomenon directly proportional to the staggering amount of debt accumulated to finance it.

The protectionist mirage and the boomerang effect of tariffs

To understand the roots of America’s fragility, one must analyse the way its trade and fiscal policies have been managed.

As was already highlighted in the wake of the first sensational announcements regarding tariff barriers, the tariff mechanism brandished by the White House has never been a sign of economic strength or industrial sovereignty, but has always been a creeping symptom of deep fiscal distress.

The initial illusion – characterised by importing firms temporarily absorbing the additional costs in order not to lose their market share – crumbled as soon as those same firms were forced to pass on the increases to end consumers, fuelling a surge in inflation that hit households hard.

The constant talk of trade barriers was a response to the desperate need to find fresh revenue to try and keep unfunded election promises afloat.

But that house of cards inevitably collapsed under the blows of the federal judiciary. Washington had misappropriatedthe International Emergency Economic Powers Act – a piece of legislation dating from 1977 designed exclusively to deal with states of emergency or nuclear threats – using it as a fiscal weapon to tax goods from the rest of the world.
The Supreme Court has swept away this regulatory framework with a clear six-to-three ruling, declaring the misuse of the law to be entirely unconstitutional.

The problems have come to a head in the accounts in dramatic fashion. Figures submitted by US Customs to the US International Trade Court show that the administration has been forced to set aside and refund over one hundred billion dollars in rebates, comprising unlawfully collected taxes and the related accrued interest. This colossal sum accounts for a large part of the $166 billion haul that Washington had raked in through the so-called ‘Liberation Day’ scheme. Treating customs revenue as a structural resource to plug budget deficits has proved to be a devastating boomerang: expenditure on refunds has turned customs duties into a drain on cash reserves, forcing the US Treasury to issue further public debt to return the ill-gotten gains to businesses.

American (debt) exceptionalism and the interest rate trap

The issue of trade barriers is merely a symptom of a far wider problem. The United States has, in fact, breached the psychological threshold of thirty-nine thousand billion dollars in federal public debt – a figure equivalent to a burden of over 120,000 dollars on every American citizen .

For decades, Washington has been able to ignore the principles of fiscal discipline thanks to the famous Triffin dilemma, according to which, in order to ensure the liquidity of global trade, the US must constantly issue dollars, effectively exporting its debt in the form of Treasury Bonds purchased by central banks around the world. Nowadays, however, this dynamic is showing alarming cracks.

The main problem is not just the size of the debt, but the skyrocketing cost of refinancing it.
Until just before the Covid-19 pandemic, the US government was able to place its government bonds at rates close to 1 per cent, whereas today it is forced to issue new bonds at yields that often exceed 5 per cent.

This drastic difference creates a vicious circle in which every maturing bond is replaced by debt that is vastly more expensive, pushing interest payments alone to exceed the staggering figure of 1,000 billion dollars a year, a sum greater than the Pentagon’s entire defence budget .

In this context, the Federal Reserve finds itself in a bind.
Having expanded its balance sheet to 9,000 billion dollars during the pandemic to absorb government-issued securities, the Central Bank has had to slow down and then halt Quantitative Tightening, as it is structurally unable to withdraw liquidity whilst the Treasury continues to flood the market with new bonds.
Added to this scenario are the so-called unfunded liabilities relating to pension and healthcare commitments under Social Security and Medicare, estimated by the Congressional Budget Office to lie within a staggering range of between 60,000 and 80,000 billion dollars.

The risk for the United States is not sudden bankruptcy, but rather a slow financial agony characterised by permanent deficits, pressure on the central bank and high inflation used as an implicit tool to devalue liabilities.

Beijing’s ticking time bomb

Whilst the situation in the US appears critical, China’s fiscal picture presents even more obscure and dangerous pitfalls.

From the post-pandemic period to the present day, Beijing’s official public debt has soared from 66 per cent to over 110 per cent of GDP, accumulating at an estimated rate of an incredible $25,000 per second.

However, the government’s figures reveal only the tip of the iceberg.
To finance its apparent technological and industrial superiority, the Chinese leadership has made extensive use of accounting mechanisms outside the state budget.

Among these , Local Government Financing Vehicles stand out – that is, investment companies set up by provincial authorities to raise capital on the bond market and within the shadow banking system.

As they were unable to issue debt directly, local governments guaranteed these companies’ loans by using building plots as collateral to finance infrastructure, motorways and industrial estates.

However, with the devastating collapse of the property market and the default of giants such as Evergrande, the provinces’ revenues have dried up, leaving these financial vehicles exposed to a sum that the International Monetary Fund estimates at between 9,000 and 10,000 billion dollars.

If this hidden debt is added to the official figure, China’s real public debt reaches a staggering 160 per cent of GDP.

Excess production capacity and stagnant consumer spending

Added to the provinces’ deficit is that of the corporate sector, whose debt stands at nearly 150 per cent of GDP, driven mainly by state-owned enterprises that enjoy unlimited access to subsidised bank credit.

This enormous volume of low-cost liquidity has been channelled into strategic sectors identified by the five-year plans, such as batteries, robotics, photovoltaics and electric vehicles, generating a massive surplus of production capacity that the domestic market is unable to absorb.

Unlike Western economies, which have supported household demand and purchasing power during periods of crisis, Beijing has chosen to subsidise only supply and industrial production.

This has created a profound structural imbalance: domestic consumption by Chinese households accounts for just 37 per cent of GDP, compared with an average of over 60 per cent in the West.

Unable to sell the vast quantity of goods it produces at home, China is forced to dump the surplus on foreign markets at rock-bottom prices, triggering extremely harsh global tariff responses.

When official public debt, provincial government debt, corporate liabilities and private debt are added together, China’s total debt has now exceeded 300 per cent of GDP.

3 per cent isn’t actually that bad

Against this global backdrop, the European Union finds itself at a decisive juncture.

Europe has chosen the path of responsibility and fiscal discipline, paying the price of slower growth in absolute terms whilst preserving long-term stability and financial soundness .

However, the challenge ahead demands that we do not stand idly by in the face of asymmetric industrial competition, driven by superpowers that subsidise their own manufacturing sectors whilst running unchecked deficits .

To avoid being crushed, the European Union must not give in to the temptation of unproductive debt, but must coordinate its resources and complete the integration of capital markets – the only means capable of channelling private savings towards major investments in innovation.

Growth at any cost, floating on a sea of American and Chinese debt, is already showing its first cracks: it is up to Europe to demonstrate that there is an alternative model based on sustainability, soundness and economic reality.