Interview: IMF Europe boss Szczurek: “The period of zero interest rates was historically an exception”

Mr. Szczurek, interest rates on debt for many industrialized countries have risen to their highest level since the financial crisis. Are we experiencing a crisis of trust?

Interest rates are rising, not just in Europe, but everywhere. There are many reasons for this: inflation, high investment demand in parts of the world, concerns about growth and high levels of debt in some countries, including Europe.

Economists warn of a new euro crisis. Rightly so?

The fact that more indebted countries pay higher interest premiums shows that the markets are paying attention to fundamentals. Higher interest rates reflect the debt of individual states. But European banks are well capitalized and the debt markets are orderly. The situation reminds us of the importance of budget consolidation. But it is not a crisis per se.

That sounds reassuring, but the budget situation of many European countries is very strained, isn't it?

Higher interest rates highlight fiscal vulnerabilities. They restrict financial flexibility and crowd out other expenses. They limit the ability to respond to shocks, and the past few years have brought us many shocks. For highly indebted economies, rapid consolidation that is as growth-friendly as possible must therefore be a priority. And we need reforms that strengthen growth.

Does Europe have to prepare for uncomfortable times with unrest like in France, when the era of low interest rates is over but national debt is high?

The phase of zero interest rates was historically an exception. Of course, there is no guarantee that we will never experience it again. However, returns of four and a half to five percent in developed countries are historically nothing unusual. What is more problematic is that these returns coincide with low actual and potential growth.

During the euro crisis, five percent was considered a critical level from which heavily indebted euro states could collapse. France and Italy are roughly at this mark now.

From my experience, financial markets don't work that way. What is crucial is credible consolidation plans that ensure debt dynamics do not spiral out of control. Higher yields make it harder for governments to stabilize debt. But five percent doesn't make it impossible.

How can budgets be rehabilitated when the political fringes become stronger and exploit every cut?

The fundamental priorities are clear: potential growth in Europe must be higher and debt must be curbed through reforms. It doesn't matter who governs.

Support for Ukraine makes fiscal consolidation even more difficult. Populist parties in particular are calling for money to be given to their own citizens. Does support for Ukraine need to come more from EU sources?

The EU states support Ukraine and this commitment should continue. This makes it all the more important to maintain the sustainability of public finances in the budgets. So the answer here is also: prioritization.

Europe has been left behind in terms of growth by the US and other regions of the world. What is slowing down growth the most?

The key challenge is weak productivity growth. The markets in Europe are still too fragmented. This slows down productivity gains and innovations. Therefore, states must initiate national reforms, especially in the labor market and in reducing bureaucracy. These reform recommendations from the IMF are also aimed at Germany.

The EU wants to defend itself more strongly against unfair trading practices by China in the future. Is this an overdue step, or is the EU starting a trade war that it can only lose?

Strengthening one's own economic security is legitimate in a world of increasing geopolitical fragmentation. In order to protect or diversify supply chains, such tools are sometimes needed. But you have to target specific vulnerabilities very specifically, because they always have costs and the risk of retaliation.

Chancellor Friedrich Merz can also accept broad countervailing tariffs if China doesn't play fairly. Doesn't he have a point?

Greater resilience must not be a justification for broad protectionism. Trade protection instruments must also not serve to preserve an outdated economic structure. We need diversification instead of isolation. To reduce geopolitical vulnerabilities, Europe should reduce trade tensions and conclude new trade agreements. And if trade policy countermeasures are taken, they should comply with international trade law.

Back to the topic of debt: Germany has little debt, but that will change significantly in the next few years. Does the debt brake need to be reformed and do debt options need to be more limited again?

Our boss Kristalina Georgieva always says our job at the IMF is to worry. But whether it goes so far that I'm now worried about Germany having too much debt... (laughs). Germany is starting from a very strong position. It has very low financing costs and its debt is by far the lowest among the G7 countries. Germany therefore has the leeway to finance infrastructure and defense spending through debt. The gaps there are real and investments can strengthen potential growth.

Germany is considered the anchor of stability in the euro area. If this role were to be lost, the entire currency area would have a problem. Is there no reason to worry?

We believe short-term easing of government spending is appropriate under the current circumstances, especially as the global economy is facing a significant shock. At the same time, Germany is being asked to spend more money due to the aging of society, but also in defense and infrastructure. Therefore, reforms on the expenditure side are necessary so that the debt ratio remains stable. This includes reforming the pension system and prioritizing spending.