How can Europe Pay for Things it Cannot Afford?
IMF News, November 4, 2025
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- Published: November 4, 2025
Baseline outlook and context
- IMF October forecast: euro area growth projections for 2025 raised to 1.2 percent.
- Medium-term growth outlook described as "mediocre"; EU GDP per capita is nearly 30 percent below that of the U.S.
- Preliminary flash estimate for Q3 broadly confirms the modest outlook.
- Recent shocks and policy shifts: pandemic, Russia’s invasion of Ukraine, shifting trade policies, front-loading of exports to the U.S. now reversing, and rising tariff pressures on export profits.
Major constraints to higher growth
- Structural Barriers:
- Intra-EU trade barriers remain significant—44 percent for goods and 110 percent for services.
- Regulatory frictions limit cross-border mobility of capital and labor.
- Absence of a unified energy market keeps costs high and undermines energy security and resilience.
- Demographic Headwinds:
- By 2050, over two-thirds of EU countries will see a decline in their working-age population.
- Investment Gaps:
- Large investment shortfalls in several countries, especially in the CESEE region, are depressing labor productivity and growth.
- Need for EU-level and domestic reforms to deepen capital markets and incentivize private investment.
Emerging fiscal pressures and quantified spending demands
- New and rising spending demands:
- Additional spending in defense, energy security, pensions, and health care estimated at 4½ percent of GDP by 2040 in Advanced Europe including the UK but excluding CESEE economies (AE excl CESEE).
- Estimated additional spending at 5½ percent of GDP in CESEE countries.
- Rising bond yields are pushing up interest costs.
- Mediocre medium-term growth and constrained labor supply weigh on revenues and increase upward pressure on debt levels.
Fiscal sustainability simulations and key numeric results
- Under current policies, simulations show public debt on a steeply-increasing path over the next 15 years, with average debt ratios across European countries reaching 130 percent by 2040.
- Sustainable reference debt path used in simulations: does not exceed 90 percent of GDP over the longer term.
- Sustainability gap implied: by 2040, average debt ratios could exceed sustainable levels by 40 percentage points.
- Closing the gap via conventional fiscal consolidation alone:
- Required deficit reduction: almost 1 percent of GDP per year for five years, a cumulative 5 percent of GDP.
- Historical precedent: successful past European consolidation campaigns yielded cumulative savings of just about 3 percent of GDP over 3-4 years.
- Impact of moderate reform package:
- Reduces cumulative adjustment needs from around 5 to just above 3.5 percent of GDP.
- Brings the average debt path one third of the distance to the sustainable path.
- About three-quarters of European countries would still need to consolidate even after these reforms.
- The average adjustment implied exceeds commitments in Medium-Term Fiscal and Structural Plans; submitted and signed off plans would fall about 2 percent of GDP short of the IMF estimates.
- Remaining hard cases:
- Around one-quarter of European countries would still need to consolidate by more than one percent of GDP per year for five years after implementing the "moderate" reforms.
- Potential savings from deeper structural change:
- If all European countries reduced the share of public financing in health, education, pensions, infrastructure and energy security to the OECD average, they could save up to 3 percent of GDP on average.
- Timing cost of delay:
- Delaying the reform and consolidation package by 5 years would raise the required fiscal adjustment by another 1½ percent of GDP.
Policy package and reform priorities (moderate and beyond)
- Moderate reform package components highlighted:
- Growth-enhancing domestic reforms that close one quarter of the gap with top-performers.
- First steps to deepen the single market and increase the EU budget for public goods such as innovation and defense, financed through joint borrowing.
- Pension reforms to stabilize spending.
- Measures to catalyze private investment through public investment banks.
- Additional policy options and structural measures:
- Larger reform drive could significantly close Europe’s GDP per capita gap with the U.S., reducing the need for fiscal consolidation.
- For high-debt countries: rethinking the scope of publicly financed services; increasing private financing while protecting the most vulnerable.
- Introducing modest user fees for some services (e.g., health care) while maintaining free access for low-income groups.
- Large tax reforms designed progressively, particularly relevant for CESEE countries with more room for revenue mobilization.
- Privatization of SOEs as an option to create fiscal space without unduly hurting those least able to bear costs.
Implementation principles and political economy
- No silver bullets: most countries will need a mix of reforms and fiscal consolidation.
- Stop "muddling through": tinkering at the margins will not keep debt sustainable and risks political backlash.
- Implementation success depends on:
- Clear communication and broad stakeholder dialogue emphasizing economic and social benefits of avoiding a disorderly correction.
- Bundling policies to share benefits and distribute burdens fairly.
- Careful sequencing to avoid overwhelming burdens on populations.
- Urgency: time is short—delay substantially increases the fiscal price of adjustment.
Speech by Alfred Kammer, Director, IMF European Department, House of the Euro, Brussels, November 4, 2025.