A Stronger Europe for Tougher Times
IMF News, June 9, 2026
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- Published: June 9, 2026
Overview
- Keynote remarks by Kristalina Georgieva, IMF Managing Director, at the “One Europe, One Market Summit”, organized by the Jacques Delors Friends of Europe Foundation, Brussels, June 9, 2026.
- Central message: Europe faces overlapping shocks that are weighing on growth and raising inflation; the response must be deeper single market integration, productivity-boosting structural reforms, and prudent fiscal policies to strengthen competitiveness, resilience, and long-term prosperity.
Shocks and near-term outlook
- Recent events in the Middle East have reversed an improving outlook: "Before Hormuz closed, Europe’s growth outlook was improving ... Now, we see growth down and inflation up."
- Europe faces an era of "shock upon shock, layer upon layer" including Covid, inflation, Russian gas, U.S. tariffs, and the Middle East events.
- Europe is relatively better prepared on energy due to a longstanding focus on renewables: "more energy efficient, less oil dependent."
Structural performance and productivity gap
- Historical and cross-country comparisons:
- "When I came to Brussels in 2010 as EU Commissioner, Europe had the same nominal GDP as the United States; now, it is significantly lower, while China has caught up to it."
- "After two decades of weak productivity growth, European income per person is 70 percent of America’s, and the gap is widening."
- "The EU’s population is some 30 percent larger than that of the U.S.—and will grow even further as new members are admitted."
- Business and market structure constraints:
- "Far too many successful European innovators end up abroad and far too few new EU firms grow in size to become globally competitive."
- "The average listed EU firm has a market capitalization of about half the U.S. average."
- "As for European peers to match the American AI 'hyperscalers,' there are none to be seen."
- Regulatory fragmentation and national gold-plating reduce policy predictability and Europe’s competitive edge.
Single market potential and quantified gains
- The single market remains Europe’s main growth engine but is still a "patchwork of 27 national regimes" with costly frictions in capital, electricity, and labor markets.
- Policy blueprint: the One Europe, One Market program—"over 30 pieces of legislation"—is presented as a comprehensive blueprint for progress.
- Quantified impact of reducing internal frictions:
- "If reforms were to reduce internal frictions to levels comparable with the U.S. while member states galvanized national reforms, EU productivity could rise by as much as 20 percent in a decade."
- That productivity gain "would raise GDP per capita by some 35 percent—or more if paired with reforms in finance."
- Fiscal benefits of faster growth:
- Faster growth "increases tax revenues, reduces safety net outlays, and lowers debt-to-GDP."
- "For the average European economy, even modest growth-enhancing structural reforms could reduce by about one-fifth the fiscal consolidation needed to put debt on a declining path."
Fiscal pressures and public debt projections
- Long-term spending pressures: rising pension and healthcare costs of an aging population, the costs of the energy transition, and defense needs.
- Estimated increase in annual public spending: "could reach 5 percent of GDP by 2040."
- Public debt projection absent policy action: "we estimate the simple-average public debt load of EU member states will more than double to over 130 percent of GDP by 2040."
- Policy implication: without reforms and smart budgetary policies, rising debt implies greater fragility and vulnerability.
Defense spending: magnitudes and policy guidance
- Recent and projected defense spending:
- Some EU countries have delivered "more than 2 percent of GDP" increases in recent years.
- Historical average from IMF World Economic Outlook study: major defense buildups across 164 countries since World War Two "involved about 2.7 percent of GDP in increased defense and security-related spending."
- This "is similar to what NATO countries are now committed to deliver by 2035."
- Fiscal cautions and design principles:
- If large defense expansions are "deficit financed, it leads to higher debt"—a key concern for countries with limited fiscal space.
- For countries with constrained fiscal space, "large and permanent increases in defense outlays be delivered in a budget-neutral manner, entailing tough tradeoffs in taxation and nondefense spending."
- Execution to maximize growth uplift:
- Near-term demand boosts can have import leakages; long-term growth potential is modest unless defense capital spending and defense R&D do not crowd out other productive investment.
- Coordination matters: duplicated national efforts, fragmented procurement, and lack of scale reduce payoffs; coordination on R&D, common procurement and standards, and open bidding expand market size and can raise productivity.
- Instruments highlighted: SAFE—Security Action for Europe—and the EU’s Multiannual Financial Framework can pool resources, minimize duplication, and invest strategically so "done right, larger defense outlays need not increase national debt burdens."
Policy recommendations and prescriptions
- Complete the single market to exploit Europe's scale and make it the main engine of competitiveness and growth.
- Implement growth-enhancing structural reforms—labor, capital, energy, and finance—to raise productivity and GDP per capita.
- Adopt smart budgetary policies to manage long-term spending pressures and reduce fiscal fragility.
- For defense buildups:
- Favor budget-neutral financing for large, permanent increases where fiscal space is limited.
- Coordinate R&D, procurement, and standards across member states to maximize productivity benefits and avoid duplication.
- Use pooled instruments (e.g., SAFE, the Multiannual Financial Framework) to scale investments efficiently.
- Political and social approach:
- "Be disciplined and firm. Be pragmatic. Build coalitions of the willing. Stop the finger-pointing between national capitals and Brussels. Bring citizens along with the reform effort."
Keynote remarks by Kristalina Georgieva, IMF Managing Director, June 9, 2026.
