According to Bloomberg, the International Monetary Fund has warned that if European countries do not control their public finances promptly, their sovereign debt situations could become uncontrollable.
On July 13th local time, several economists from the IMF wrote a paper stating that under the increasing pressures of aging populations, energy transitions, and rising military expenditures, the 'piecemeal' fiscal policies adopted by many European countries are becoming unsustainable.
They say, “If long-term spending pressures are not addressed, the debt situations in many European countries could become explosive. Given the huge scale of adjustments needed, mere minor tweaks are clearly insufficient. Such actions could also lead to a growing aversion to reform.”
According to estimates by IMF economists, by 2040, the average annual increase in public spending in European countries will be equivalent to 5% of their gross domestic product (GDP). Economic growth will be moderate, and public willingness to raise taxes or cut expenditures significantly is limited. This will make public debt unsustainable, with the proportion of debt to GDP reaching 130%, which is about twice the current level.
The IMF recommends that Europe should adopt a “gentle” reform strategy, reducing the gap between spending and debt by about one-third. Among these measures, reforms to pension systems and efforts to promote economic growth will have the greatest positive impact.
However, most European countries still need to undergo substantial fiscal adjustments. IMF economists say that these two measures are usually necessary, and both involve some political dilemmas. “The greater the progress made in reforms, the easier the task of fiscal integration becomes. But relying solely on reforms cannot address the risks related to fiscal sustainability.”
