{
  "title": "How can Europe Pay for Things it Cannot Afford?",
  "publication": "IMF News, November 4, 2025",
  "sourceUrl": "https://www.imf.org/en/news/articles/2025/11/04/sp110425-ak-how-can-europe-pay-for-things-it-cannot-afford",
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  "summary": "Alfred Kammer, Director of the IMF European Department, delivers a speech at the ECB’s House of the Euro in Brussels on Europe’s fiscal sustainability challenge.",
  "publishDate": "2025-11-04",
  "sections": [
    {
      "heading": "Baseline outlook and context",
      "content": "- IMF October forecast: euro area growth projections for 2025 raised to 1.2 percent.\n- Medium-term growth outlook described as \"mediocre\"; EU GDP per capita is nearly 30 percent below that of the U.S.\n- Preliminary flash estimate for Q3 broadly confirms the modest outlook.\n- 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."
    },
    {
      "heading": "Major constraints to higher growth",
      "content": "- Structural Barriers:\n  - Intra-EU trade barriers remain significant—44 percent for goods and 110 percent for services.\n  - Regulatory frictions limit cross-border mobility of capital and labor.\n  - Absence of a unified energy market keeps costs high and undermines energy security and resilience.\n- Demographic Headwinds:\n  - By 2050, over two-thirds of EU countries will see a decline in their working-age population.\n- Investment Gaps:\n  - Large investment shortfalls in several countries, especially in the CESEE region, are depressing labor productivity and growth.\n  - Need for EU-level and domestic reforms to deepen capital markets and incentivize private investment."
    },
    {
      "heading": "Emerging fiscal pressures and quantified spending demands",
      "content": "- New and rising spending demands:\n  - 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).\n  - Estimated additional spending at 5½ percent of GDP in CESEE countries.\n- Rising bond yields are pushing up interest costs.\n- Mediocre medium-term growth and constrained labor supply weigh on revenues and increase upward pressure on debt levels."
    },
    {
      "heading": "Fiscal sustainability simulations and key numeric results",
      "content": "- 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.\n- Sustainable reference debt path used in simulations: does not exceed 90 percent of GDP over the longer term.\n- Sustainability gap implied: by 2040, average debt ratios could exceed sustainable levels by 40 percentage points.\n- Closing the gap via conventional fiscal consolidation alone:\n  - Required deficit reduction: almost 1 percent of GDP per year for five years, a cumulative 5 percent of GDP.\n  - Historical precedent: successful past European consolidation campaigns yielded cumulative savings of just about 3 percent of GDP over 3-4 years.\n- Impact of moderate reform package:\n  - Reduces cumulative adjustment needs from around 5 to just above 3.5 percent of GDP.\n  - Brings the average debt path one third of the distance to the sustainable path.\n  - About three-quarters of European countries would still need to consolidate even after these reforms.\n  - 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.\n- Remaining hard cases:\n  - 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.\n- Potential savings from deeper structural change:\n  - 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.\n- Timing cost of delay:\n  - Delaying the reform and consolidation package by 5 years would raise the required fiscal adjustment by another 1½ percent of GDP."
    },
    {
      "heading": "Policy package and reform priorities (moderate and beyond)",
      "content": "- Moderate reform package components highlighted:\n  - Growth-enhancing domestic reforms that close one quarter of the gap with top-performers.\n  - First steps to deepen the single market and increase the EU budget for public goods such as innovation and defense, financed through joint borrowing.\n  - Pension reforms to stabilize spending.\n  - Measures to catalyze private investment through public investment banks.\n- Additional policy options and structural measures:\n  - Larger reform drive could significantly close Europe’s GDP per capita gap with the U.S., reducing the need for fiscal consolidation.\n  - For high-debt countries: rethinking the scope of publicly financed services; increasing private financing while protecting the most vulnerable.\n  - Introducing modest user fees for some services (e.g., health care) while maintaining free access for low-income groups.\n  - Large tax reforms designed progressively, particularly relevant for CESEE countries with more room for revenue mobilization.\n  - Privatization of SOEs as an option to create fiscal space without unduly hurting those least able to bear costs."
    },
    {
      "heading": "Implementation principles and political economy",
      "content": "- No silver bullets: most countries will need a mix of reforms and fiscal consolidation.\n- Stop \"muddling through\": tinkering at the margins will not keep debt sustainable and risks political backlash.\n- Implementation success depends on:\n  - Clear communication and broad stakeholder dialogue emphasizing economic and social benefits of avoiding a disorderly correction.\n  - Bundling policies to share benefits and distribute burdens fairly.\n  - Careful sequencing to avoid overwhelming burdens on populations.\n- Urgency: time is short—delay substantially increases the fiscal price of adjustment.\n\nSpeech by Alfred Kammer, Director, IMF European Department, House of the Euro, Brussels, November 4, 2025.\n\n---\n\n\n References\n\n- Alfred Kammer\n- Belgium and the IMF\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2025/11/04/sp110425-ak-how-can-europe-pay-for-things-it-cannot-afford"
    }
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    "Published: November 4, 2025",
    "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.",
    "Structural Barriers:",
    "Demographic Headwinds:",
    "Investment Gaps:",
    "New and rising spending demands:",
    "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.",
    "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:",
    "Impact of moderate reform package:",
    "Remaining hard cases:",
    "Potential savings from deeper structural change:",
    "Timing cost of delay:",
    "Moderate reform package components highlighted:",
    "Additional policy options and structural measures:",
    "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:",
    "Urgency: time is short—delay substantially increases the fiscal price of adjustment.",
    "[Alfred Kammer](https://www.imf.org/en/About/senior-officials/Bios/alfred-kammer)",
    "[Belgium and the IMF](http://www.imf.org/external/country/BEL/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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