The ever-increasing levels of public debt in Europe should push governments to fundamentally reconsider their role in providing basic services to EU citizens, according to the International Monetary Fund (IMF), which considers it an urgent necessity to impose shock measures on economies that will overturn the famous European model.
In a study published on Tuesday, November 4, the IMF warned that Europe’s debt levels risk becoming “explosive” if reforms are not implemented in labor markets and businesses, and if fiscal deficits are not reduced through increased tax revenues, limiting social spending, and improving public sector efficiency.
However, the Fund also warned that Europe’s debt levels, which are expected to double by 2040, reaching an average of 130% of GDP, are now so high that even with rapid reforms, “reconsidering the role of the state in the economic sphere may be inevitable in some countries.”
“If reforms and medium-term fiscal adjustment are not sufficient, then more radical measures could include re-evaluating the scope of public services and other state functions, something that may affect the social contract,” stated the IMF.
Here is the IMF study
The surge in public debt comes at a time when EU governments are under increasing pressure to support aging populations while simultaneously increasing strategic investments, particularly in green technology and defense.
Last year, the former head of the European Central Bank (ECB), Mario Draghi, stated that the EU should increase its annual investments by at least €800 billion per year, or about 4–5% of the Union’s annual GDP, so as not to fall behind the United States and China.
According to him, up to half of this amount should come from the public sector.
Today, twelve of the 27 EU Member States have a debt-to-GDP ratio above the 60% limit set by the Union.
Several large economies, among them Italy, France, and Spain, have debt above 100% of GDP.
Italy and France are also among the nine EU countries under the Excessive Deficit Procedure by the European Commission, due to exceeding the 3% limit for fiscal deficit.
However, it notes that relatively low borrowing yields, higher tax revenues, and deeper, more liquid capital markets now allow most European governments to maintain a debt/GDP ratio of up to 90% without jeopardizing fiscal sustainability.
What are the proposed reforms
The Fund added that the need to curb deficits and debt could be significantly mitigated through reforms that boost growth, such as:
1) Deepening the Single Market for capital and energy,
2) Simplifying the regulatory framework for businesses, and
3) Issuing common European debt to finance critical “public goods,” such as energy and defense infrastructure.
Even so, a “moderate reform package” is unlikely to restore debt sustainability in many member states, the IMF said.
Public spending cuts of 1% of GDP for five years
About one-quarter of European countries will need to cut net public spending by more than one percentage point of GDP annually for five consecutive years, significantly more than the usual fiscal adjustment of recent decades.
“In these countries, the discussion about the scope and sustainability of the ‘European model’ seems inevitable,” the Fund emphasized.
Governments, according to the report, could attempt to distinguish between “basic” and “premium” services in critical sectors such as pensions, education, and health, with only the basic services remaining publicly funded and freely available.
Intense social reactions
The Fund, however, acknowledges that such measures are likely to face strong social backlash, as in many European countries anti-government dissatisfaction is already increasing due to the decline of public services, deindustrialization, and wage stagnation or cuts.
Alfred Kammer, Director of the European Department of the IMF, stated that “some segments of the European population will experience the proposed reforms as painful, but we must face that pain.”
“When you make reform, you don’t want to cause only pain for years,” Kammer told journalists, adding that governments should be honest and seek compromises with citizens.
The Fund concluded that “gradual steps” are more likely to be realistic and gain public support.
“Governments must clearly explain the rationale behind reforms, identify the spending pressures they face, and redefine public expectations,” stated the IMF.
At a complete dead end
It could not be claimed that Europe has no debt problem.
The data give partial support to this claim: although debt is historically high, it remains lower than the 110% average of developed economies.
Furthermore, the eurozone’s debt/GDP ratio stands at 88%, about 20 percentage points higher than in 2000, but 10 points lower than in 2020.
It estimates that if no measures are taken, Europe’s public debt will reach 130% by 2040, exceeding the “concern threshold” of 90%, beyond which markets may react strongly.
Are there alternatives?
Maria Demertzis, head of the think tank Economy, Strategy and Finance Centre at Conference Board Europe, notes that the risks associated with high EU country debts are exacerbated by low growth, another key pathology of the European economy.
“As long as the economy grows and remains productive, the need for immediate debt reduction is not pressing,” she said.
“But if there are structural problems in growth and productivity, then the issue becomes much more urgent.”
Demertzis also stressed the mathematical reality that if governments do not actively repay their debt, the debt/GDP ratio will rise when growth slows or declines.
She argued that the reforms proposed by Draghi, such as removing national barriers to the integration of European financial markets, could strengthen growth and reduce the need for drastic cuts to the welfare state.
“Can we find the political will to accept that national interests are also European interests? That is what we must do,” she said.
All this does not necessarily mean that the International Monetary Fund is wrong.
But it shows that there are many alternative, politically less toxic solutions worth considering before governments abandon one of the main pillars of modern European society.
After all, as any Catholic priest would say: If you are going to read someone their last rites, make sure first that they are not going to survive.
www.bankingnews.gr
Σχόλια αναγνωστών