IMF calls for 'significant adjustments' in eurozone

The International Monetary Fund (IMF) on Thursday urged eurozone countries with “limited” fiscal space and high debt to make “significant adjustments” to their budgets as they face “expenditure pressures”.

“For countries with high debt and limited fiscal space, significant fiscal adjustments are needed to mitigate risks, while countries with fiscal space can postpone fiscal adjustment,” said the body led by Kristalina Georgieva in a report on the state of the eurozone economy, presented today to the single currency's finance ministers at a meeting in Luxembourg.

In the document, the IMF stresses that “ensuring orderly and growth-friendly fiscal consolidation to address country-specific risks is vital to preserving fiscal sustainability and managing expenditure pressures associated with population ageing and rising security spending”.

Specifically, it recommends that all euro countries, except Germany, achieve a positive structural primary balance of 1.4% of GDP by 2030, which requires “an additional cumulative deficit reduction of around two percentage points in the period 2024-2030, compared to the baseline scenario”.

However, the IMF acknowledges that the “necessary” fiscal consolidation requires “complex” choices to be made, because “at the same time, Europe faces growing spending pressures that are crystallizing faster than anticipated”.

Specifically, the IMF estimates that these “pressures” resulting from rising interest rates, an aging population, the climate transition, and energy security and defense “will reach 4.4% of GDP per year in European economies by 2050.”

As for the intention of several European governments to increase their defense spending, the IMF urges Brussels and EU partners to analyze its impact on public debt sustainability and “develop plans to put debt on a stable or decreasing path in the medium term.”

“The use of safeguard clauses to support increased defense spending by member states should be limited to the initial phase,” said the IMF, whose managing director said at a press conference that the eurozone “must move forward with coherent and effective policies to increase its growth potential.”

“And it is important to ensure that the new priorities in terms of public spending are met without compromising sustainability,” he added.

In any case, the report stresses that countries with “low fiscal risks” that want to increase spending to stimulate economic growth and “strengthen resilience” should be able to do so and should not be constrained by the EU’s new fiscal rules.

The IMF calls for coordinated investment in the bloc's priority areas to effectively address these "challenges", while alleviating the burden on national budgets.

“Identifying investment gaps and areas where EU initiatives offer cost-effective solutions can provide a blueprint for priority actions, for example in investments in public goods such as innovation, the clean energy transition or collective defence,” the document says.

To this end, the IMF considers that the EU budget “will have to increase by at least 50% so that current programs can be maintained”.

At a press conference on the sidelines of the Eurogroup meeting, the IMF managing director also warned that trade uncertainty and geopolitical tensions were slowing growth in the eurozone and urged European authorities to act quickly and decisively to compete globally.

“There is no room for delay because Europe’s major trading partners are moving very quickly, they are reshaping the terms of global integration and if the EU does not take decisive action it will enter a dangerous decline relative to other major advanced market economies,” he said.