IMF Warns EU Public Debt Could Become "Explosive" Without Action

NICOSIA — European Union’s public debt trajectory could become “explosive,” hurting the bloc's economy, if no action is taken to deal with fiscal pressures, the International Monetary Fund told EU finance ministers on Saturday.

"If left unchecked, public debt will be on an ​unsustainable path. Under unchanged policy, debt of the average European country would reach 130 percent ​of GDP by 2040 — roughly doubling from today," the IMF said in a paper ⁠presented to the finance ministers during an informal meeting in Nicosia.

The Fund warned that EU governments will face increased spending pressure for defense, energy and pensions in the next 15 years. It suggested a mix of structural reforms, as well as fiscal reforms, joint borrowing and fiscal consolidation to cope.

“The 'muddling-through' approach that many countries have adopted so far is reaching its limits, and a more strategic response seems essential to respond to rising spending pressures,” it added.

The European Court of Auditors also told the finance ministers that doing nothing is not an option, highlighting the need for fiscal consolidation measures.

The IMF paper calls EU countries to incentivize work and hiring across the ​27-country bloc, simplify citizens' savings flow across the bloc into investments, energy markets integration and implementation of climate-resilient projects. Pension reforms and a higher retirement age would also help.

EU should agree ‌that ⁠innovation, energy and defense are public goods and should be financed through joint borrowing, it adds. The bloc has remained deadlocked on the idea of sharing the debt to unlock additional funds, with some countries like Spain, Italy, Greece or France strongly in favor and others, like Germany, strongly opposing.

“We are faced with a new and permanent spending needs," EU Economy Commissioner Valdis Dombrovskis said in a press conference after the meeting of finance ministers. "At the same time, the available fiscal space is already constrained, debt levels are high, and the population aging is adding to the challenge,” he said.

“This is not an abstract problem. It's a very concrete and pressing policy challenge that we are facing here. Solution in short is more growth and better spending,” Dombrovskis said.

He added that joint borrowing is already a reality, as this is how projects to strengthen the EU’s defense capabilities and Ukraine’s support loan have been financed.